August Economic Update

Market Summary

July had a whirlwind of market moving headlines including waning economic data, the Federal Reserve signaling a path to lower interest rates, cooling inflation data, and concerns over AI profitability from the largest US technology companies. All of this culminated with mixed market returns between various sectors followed by weakening performance across the board into the beginning of August.

For last month, the S&P 500 managed to squeeze out a small gain of 1.13% while the Nasdaq lagged from weak technology earnings reports retreating -1.63%. The small cap Russell 2000 index drastically outperformed the other indices gaining 10.1% for the month on the tailwinds of the Federal Reserve’s interest rate announcement. While this was an impressive gain for the index which is often a leading economic indicator, those gains have since been erased with weak economic data in the beginning of August. (1)

Inflation & the Federal Reserve

There was renewed confidence that inflation is back on track to the downside after months of stagnation. On July 11th, the latest CPI release showed headline inflation fell to 3.0% which is the lowest reading since July 2023. However, a couple of weeks later, the Federal Reserve’s primary inflation indicator, Core Personal Expenditures, ticked slightly higher to 2.6% from a previous reading of 2.5%. (2)

Overall, during the Federal Reserve’s July 31st announcement, Chairman Jerome Powell noted recent data has added confidence that inflation is moving in the right direction again while still noting that, “we still need greater confidence on inflation.” Regarding interest rates, Powell stated if inflation continued to move lower into the next interest rate decision in September, then a rate cut, “would be on the table.” (3)

Economic Concerns

Weakening consumer demand was in the spotlight again last month with corporate earnings reports and statements from consumer discretionary companies showed Americans are less willing to open their wallets and spend into the economy. Companies such as McDonalds, Home Depot, Amazon, and Starbucks all cautioned investors that the average consumer is tightening their belts and looking for cost-conscious bargains to quell their personal spending.

As we moved into August, some recessionary data came to light beginning with weak manufacturing data. The Institute for Supply Management (ISM) releases survey data from manufacturing companies across the US. These data can often times be a leading economic indicator. The most recent report showed the Purchasing Managers Index (PMI) posting a reading of 46.8. Any reading below 50 is considered to be indicative of economic contraction. (4)

The following day after the ISM data was released, we had a surprise weak jobs report released by the US Bureau of Labor Statistics. The market was expecting 176k jobs to be added for the previous month, but that number was only 114k – the lowest since January of 2021. Furthermore, the unemployment rate ticked higher to 4.3%. While this is still historically low, it is the largest unemployment figure we have seen since March 2021 as our economy was coming out of the COVID job loss spike. (5)

Looking Forward…

Volatility has returned this month on the heels of the aforementioned economic data, as well as renewed concerns regarding the Middle East. After recent attacks on Hamas and Hezbollah leaders, there is growing speculation that Iran may launch an attack on Israel which could in turn spark a larger conflict in the region. While the recent market pullbacks are well within ordinary market corrections, such a conflict could fuel further downside if these threats materialize into something larger.

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Monthly Financial Tip:

Thinking of snowbirding? Consider the monetary factors such as property upkeep, maintaining your Northern residence, and how to qualify as a resident in a state with a more favorable tax code. While snowbirding can be fun, but you may want to “rent” the experience before you buy it.

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Citations:

1. WSJ.com, July 31, 2024

2. Investing.com, July 11, 2024

3. Federal Reserve, July 31, 2024

4. Investing.com, August 01, 2024

5. Investing.com, August 02, 2024

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.