It was a turbulent week for the equity markets. Major indexes closed in or near correction territory following a weak jobs report on Friday. There was a significant downturn in tech stocks, marking the steepest three-week slump for this sector in two years, led by sharp declines in Amazon and Intel. Small-cap value stocks were hit even harder due to growing recession fears. For the week, the S&P 500 lost over 2%, while small-cap value stocks dropped over 6%. However, international stocks outperformed the U.S., driven by emerging markets, which are now outperforming the U.S. for both the quarter and the last six months.
There were some bright spots in the stock market, though. Several sectors in the U.S. stock market experienced gains last week including utilities, health care, real estate, and consumer defensive stocks. Elsewhere, despite higher gold prices, commodities lost ground last week. Alternative investments also saw slight losses. Conversely, it was a particularly strong week for the overall bond market, as the 10-year Treasury yield dropped to a 52-week low, ending the week at 3.80%. However, high-yield bonds did experience a decline.
The major economic news last week was Friday’s unemployment report. Although job growth was positive, it fell below expectations. The unemployment rate also rose to 4.3% from 4.1%. This report prompted significant media coverage, particularly concerning the “Sahm Rule,” which was triggered due to Friday’s labor data. This rule is regarded as a historically reliable recession indicator. This signal is created when the unemployment rate has risen by half a percent or more relative to its lowest point in the last 12 months.
Getting back to the stock market, the S&P 500 is now approximately 7% down from its July 16th high, marking the largest pullback this year. Such pullbacks are not uncommon though, with twenty-nine corrections of more than 5% occurring since March 2009.
This week is relatively light in terms of the economic calendar but promises to be another active week for corporate earnings. Speaking of earnings, while as always there are mixed results, this season in the aggregate has been promising so far, including last week’s reports. At the end of last week, the blended earnings growth rate for the second quarter stood at 11.5%, compared to 9.8% from the previous week and 8.9% at the end of the second quarter. If 11.5% holds as the actual growth rate for the quarter, it will represent the highest year-over-year earnings growth rate reported by the index since Q4 2021. It will also mark the fourth consecutive quarter of year-over-year reported earnings growth for the index.
Despite last week's weaker economic data, the Atlanta Fed’s GDPNow is still tracking 2Q GDP at 2.5%. However, these growth figures are for the second quarter, and the market may be signaling different expectations for this quarter and beyond – or is it? Granted this data is looking back and the markets are looking forward, but given the second quarter momentum, the economy may still be more resilient than many fear. Indeed, Fed Chair Jerome Powell noted at the Fed’s press conference last week that much of the economic data reflects a "normalizing labor market" after the extraordinary monetary and fiscal response to COVID several years ago. There is validity to this perspective.
It’s also important to remember that the overall stock market has had a strong year so far. It is normal for the market to experience a period of consolidation and retracement, particularly as August and September tend to be weaker-than-average months. Short-term volatility also increases due to political uncertainty, which we have surely had more of lately. Could this pullback, combined with stronger earnings, present an excellent buying opportunity?
In summary:
Stay invested. Stay diversified. Stay disciplined.
If you have any questions or comments, please let us know at strategists@brinkercapital.com or at rusty@orion.com. Thank you for your time and trust. See you next week!