Despite last week's shortened schedule due to the Labor Day holiday, it turned out to be the worst week for the S&P 500 since March 2023. That was a tense period marked by the collapse of Silicon Valley Bank, which suffered a bank run on its assets. Last week’s losses, however, were largely driven by nuanced concerns over economic growth, but also by profit-taking in the technology sector, particularly AI stocks. Nvidia (NVDA), for example, dropped 14% last week, losing over $400B — the largest weekly market cap value loss ever according to Dow Jones market data.
The key economic report last week was the release of the non-farm payrolls report for August on Friday, which offered a snapshot of the U.S. labor market. While job growth came in slightly below expectations, the report did not significantly alter the market’s outlook on the Federal Reserve's next move, expected at their meeting on September 18th. The consensus still points toward a rate cut, with most anticipating a quarter-point reduction, though a half-point cut remains a possibility. The unemployment rate ticked down to 4.2% from 4.3%, marking its first decline in five months. Meanwhile, wage growth rose to 3.8% year-over-year, which slightly contrasts with recent declines in inflation but bodes well for consumer purchasing power, as wages have outpaced inflation over the past 12 months.
Looking ahead, the key economic focus this week shifts to inflation. The Consumer Price Index (CPI) is due on Wednesday, with core CPI expected to increase by 3.2% year-over-year. On Thursday, the Producer Price Index (PPI) will be released, with core PPI forecasted at 3.3%. Despite these inflation reports, the market seems increasingly concerned about economic growth rather than inflation in the short term.
So, what should we make of the recent market weakness? Seasonal factors could be contributing, as the market historically delivers below-average returns at this time of year. However, the broader picture remains positive. The market is still in a bullish trend, and earnings growth has improved over the last several quarters, with the most recent quarter seeing the best year-over-year earnings growth in years.
Additionally, interest rates are moving lower. Last week, for instance, the 10-year Treasury yield declined from 3.9% to 3.7%. Notably, mortgage rates have steadily declined in recent months, with 30-year mortgage rates now dropping about 1% since May. Also providing relief to consumers is that oil and gasoline prices are down. As for economic concerns, it should be noted that credit spreads, in other words, the yield difference between corporate and Treasury bonds, remain stable. This is often considered a sign that economic conditions are not deteriorating dramatically.
In summary:
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