Market Momentum: Your Weekly Financial Forecast
Issue 8 / What to expect for Aug 05 - August 09, 2024
Weekly Wrap-Up
During the week of July 29 through August 2, 2024, the U.S. financial markets faced a tumultuous period marked by significant volatility and mixed economic signals. Major indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq, experienced notable declines, driven by concerns over an economic slowdown and disappointing corporate earnings.
The week began with a focus on corporate earnings, with several high-profile companies releasing their quarterly results. Meta Platforms, Amazon, and Intel were among the notable names. Meta reported better-than-expected earnings, driven by strong ad revenue growth and continued expansion in its virtual reality segment. However, Amazon's results were disappointing, with the company missing revenue estimates and providing a weaker-than-expected outlook. This sent Amazon's stock tumbling, contributing to broader market declines. Intel also faced a challenging week, as the company announced significant job cuts and provided a gloomy outlook, leading to a sharp drop in its stock price.
Geopolitical tensions further exacerbated market jitters, particularly the assassination of a prominent Hamas leader, which heightened concerns about stability in the Middle East. This geopolitical development led to a rush into safe-haven assets, with U.S. Treasury yields falling significantly. The yield on the 10-year Treasury note dropped to its lowest level since December 2023, reflecting investor anxiety and a flight to safety.
Economic data released during the week added to the market's concerns. The U.S. jobs report for July showed a significant slowdown in job creation, with nonfarm payrolls increasing by just 114,000, well below expectations. The unemployment rate rose to 4.3%, the highest level in over a year, indicating a potential softening in the labor market. The report also showed a modest increase in hourly earnings, suggesting limited wage pressures. These data points led to increased speculation about a potential rate cut by the Federal Reserve, as markets began to price in a greater likelihood of monetary easing to support the economy.
In the context of market volatility, the Cboe Volatility Index (VIX), often referred to as the "fear gauge," spiked to levels not seen since early 2023. This surge in volatility underscored the heightened uncertainty among investors, as they grappled with mixed economic data and corporate earnings. The tech-heavy Nasdaq was particularly hard hit, officially entering correction territory, having declined 10% from its recent highs.
Sector-specific news was also influential. The consumer discretionary sector faced significant pressure, with stocks like Amazon and Tesla seeing declines due to concerns about slowing consumer spending. Conversely, defensive sectors such as consumer staples and utilities outperformed, as investors sought safer havens amidst the market turbulence. Companies like Procter & Gamble and Coca-Cola saw gains, reflecting a shift towards more stable, dividend-paying stocks.
The energy sector experienced mixed results, influenced by fluctuating oil prices. Crude oil prices initially rose on concerns about geopolitical instability but later fell as fears of a global economic slowdown took precedence. The PHLX Semiconductor Index (SOX), which includes major chipmakers like Nvidia and Taiwan Semiconductor, also experienced a sharp decline, as the sector grappled with concerns about overvaluation and a potential slowdown in demand.
Bonds are red-hot right now. The yield curve has been inverted for over two years, with short-term bond yields higher than long-term ones, signaling restrictive Fed policy and economic caution. Recently, there's been a shift, as the Fed hints at easing rates. This has led to a rally in bond prices and a drop in yields, particularly in 2-year and 10-year notes. As the Fed moves towards rate cuts, short-term yields are expected to decline faster, normalizing the yield curve. Many investors weighing the risks of holding too much cash in a falling rate environment.
Adding to the market's complexity, the Sahm Rule, a recession indicator, was triggered. The Sahm Rule suggests that a recession is likely when the three-month average unemployment rate rises by 0.5 percentage points or more relative to its low over the previous 12 months. With the unemployment rate increasing to 4.3%, this indicator raised further concerns about the possibility of an economic downturn, reinforcing the cautious stance among investors.
In conclusion, the week of July 29 through August 2, 2024, was characterized by significant market volatility, driven by a combination of disappointing corporate earnings, geopolitical tensions, and mixed economic data. The potential for a rate cut by the Federal Reserve emerged as a key focus for investors, as they assessed the implications of a slowing economy and rising unemployment. Defensive sectors gained favor, while tech and consumer discretionary stocks faced pressure. The activation of the Sahm Rule added another layer of concern, highlighting the delicate balance between growth and inflation in the current economic landscape. As the market looked ahead, the potential for further monetary easing and the trajectory of economic data remained central to investor sentiment.
