Our thoughts and perspective on this week's movements in the financial markets...
The Dog Days of Summer have been unsettled by several daily movements of over 1% in the major stock market indices.
Until the end of July, our financial markets had been relatively well-behaved. Historically, over the 25 years ending June 30, 2024, the S&P 500 index moved 1% or more (up or down) an average of 72 days per year. In the first six months of 2024, we experienced only 20 such days, with more upward than downward movements.
Through July 31st, the major indices have performed as follows:
S&P 500: 16.7%
Dow Jones Industrial Average: 9.52%
Russell 2000: 12.07%
S&P U.S. Aggregate Bond Index (Total Return): 1.83%
As we've emphasized to our clients, the S&P 500's performance has been significantly influenced by the so-called "Magnificent 7". Despite comprising only seven companies out of 500, their weighting in the index has been responsible for an outsized proportion of its returns.
On July 31st, the Federal Reserve concluded its two-day meeting. In his press conference, the Fed Chair strongly signaled the possibility of rolling back some interest rate hikes at the September meeting. This was based on inflation moving towards the Fed's 2% target and the expectation of further easing in labor market tightness. With unemployment at 4.1%, the Fed appeared to be meeting its dual mandate of price stability and full employment. The market cheered this good news on Wednesday. So, what could go wrong?
The July 2024 Manufacturing PMI & ISM Manufacturing reports, released at 10:00 AM EST yesterday, showed the manufacturing sector contracted for the fourth consecutive month and the 20th time in the last 21 months. This appears to have catalyzed the sell-off.
At Katapult Wealth Partners, we've maintained for over 18 months that while the overall economy is relatively robust, we believe there has been a rolling recession, particularly in the manufacturing sector. Yesterday, this view seemed to gain broader acceptance.
Let's be frank: the ensuing selling was exacerbated by market traders looking for an excuse to take profits.
This morning, the Bureau of Labor Statistics released the Non-Farm Payrolls and Unemployment rates. Payrolls rose by 114,000, far below the expected 185,000, and the unemployment rate climbed to 4.3%. This ignited round two of selling, with major market indices down 2% to 3% just a couple of hours before market close.
Key takeaways and what to do:
- Investing is a long game, akin to Katie Ledecky's consistent 1500-meter swim for gold in Paris, not a 50-meter dash.
- Asset allocation matters. While the "Magnificent 7" garnered headlines, boring, favorably priced value stocks have gained significantly on high-growth companies.
- The bond market has been rallying. The inversion between 2-year and 10-year treasuries (a relatively reliable recession predictor) has narrowed to its lowest reading in 12 months.
- We tailor risk and volatility to your comfort level and financial objectives. If these can't align, we'll discuss adjusting either the volatility or the objectives.
- Keep reactive emotions out of investing. Let's discuss this one-on-one.
- Look at opportunities this pullback creates to put money to work.
- Interest rates have decreased significantly; those 5% money market funds will soon disappear. We can help you lock in higher yields for longer.
Please don't hesitate to contact us with any questions.