Weekly Market Performance — August 2, 2024

Additional content provided by Brian Booe, Associate Analyst, Research.

LPL Research provides its Weekly Market Performance for the week of July 29, 2024. As markets turned to the eighth page of the 2024 calendar, the business end of second quarter earnings season and central bank decisions acted as strong headwinds for stocks. U.S. equity indexes closed lower this week as investor patience for returns on artificial intelligence investments showed signs of being stretched thin, and markets became weary of a lagging Federal Reserve (Fed) amid weakening economic data. Overseas, similar themes remained in play as Europe ended the week in the red on glum earnings despite a rate cut from the Bank of England (BOE). Asian markets dipped on falling tech stocks and a Bank of Japan (BOJ) rate hike. Meanwhile, Treasury prices rallied sharply across the curve as yields sank to recent lows following soft jobs data to end the week. Evidence of a slowing job market weakened the dollar, and a volatile yen surged on the updated BOJ policy.

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

Source: LPL Research, Bloomberg 08/02/24 @ 3:00 p.m. ET
Disclosures: Indexes are unmanaged and cannot be invested in directly.

U.S. and International Equities          

Markets: After the S&P 500 and Dow Jones Industrial Average sealed monthly gains intraweek, the three major indexes declined sharply in action-packed, choppy trading sessions. The tech-heavy Nasdaq led declines, tumbling 3.6%, while the S&P 500 closed 2.6% lower over the last five sessions. The Dow held up relatively well most of the week, but accelerated losses on Friday pushed the index down nearly 2.4%. Value stocks continued to outperform their growth counterparts, although both asset classes ended in the red. 

Markets faced strong catalysts this week, headlined by Magnificent Seven earnings and the Federal Open Market Committee (FOMC) interest rate decision. Investors continued to rotate between large cap sectors and small caps early in the week while big tech ultimately dipped after a failed rebound. Microsoft (MSFT), which led off big tech earnings, fell as cloud revenue failed to meet expectations, signaling a stretch in investor patience for returns on artificial intelligence (AI) investments. This theme continued, grabbing the market’s attention as shares of Amazon (AMZN) and Intel Corp. (INTC) took a dive following their respective earnings reports. AMZN plans to continue AI spending and lowered profit expectations as a result, and INTC announced a workforce reduction plus dividend suspension beginning in the fourth quarter due to heavy AI spending and cash flow concerns. A tech selloff ensued, pulling major indexes lower. On the macro front, the FOMC held rates unchanged as expected at its July meeting, however, Fed Chair Jerome Powell delivered dovish remarks in the following press conference. The initial market reaction was somewhat positive until increasing jobless claims data, a rising unemployment rate, and slowing job growth sparked investor concern about the Fed potentially being behind the curve. Defensive sectors and Treasuries were beneficiaries as investors moved to a risk-off stance.  

Earnings results and central bank decisions also captivated European markets, as the STOXX 600 of European markets ended the week 2.9% in the red. Markets started the week strong on positive sentiment around upcoming decisions from the BOE and Fed, combined with stronger-than-expected Eurozone gross domestic product (GDP) data. Sentiment dampened midweek on rising Eurozone Consumer Price Index (CPI) data, glum earnings reports from automakers Volkswagen and BMW, and downward pressure on bank stocks following mixed reports. Simultaneously, market reaction was rather muted as markets digested micro data and the first BOE rate cut in four years. To end the week, banks continued to tumble, while the U.S. tech sell off and central bank anxiety spilled across the Atlantic, sealing a weekly decline in Europe.   

Similar themes also held Asian markets attention, as central bank action and technology names pulled Asian markets broadly lower. The BOJ raised rates by 0.25% and unveiled a plan to reduce bond purchases; however, Japan ended the week lower on continued yen volatility and sliding tech stocks. Japan neared a technical bear market (in yen terms) as the rout on Thursday and Friday was the largest decline since the market's reaction following the 2011 tsunami. Greater China posted its best day in four months on Wednesday on consumer stimulus hopes, but most major indexes pared gains to end the week lower after Purchasing Managers’ Index (PMI) data unexpectedly contracted. Taiwan and South Korea were pulled lower on the back of technology declines, as India also declined, but ended as a relative outperformer. Australia and New Zealand were bright spots, ending in positive territory with Southeast Asia mostly higher.  

Fixed Income:  The Bloomberg U.S. Aggregate Bond Index traded sharply higher as yields meaningfully declined over the last five sessions. Bond prices experienced a huge rally as investors turned to Treasuries as one of the latest haven trades following soft late-week macro data and markets priced in more aggressive rate cuts. The 10-year Treasury yield closed almost 40 basis points lower during the week, while the monetary policy-sensitive two-year yield experienced steeper declines and finished the week down nearly 50 basis points. Yields held relatively steady until after Fed Chair Powell’s press conference Wednesday. However, Thursday’s jobless claims and manufacturing survey data and Friday’s unemployment rate pulled yields sharply lower as the yield curve experienced further steepening.   

To add some color, the Fed’s statement on Wednesday was unambiguously dovish, and Chair Powell hinted the FOMC is coalescing around a first rate cut in September. However, after Friday’s payroll data, fixed income markets are pricing in over 4.5 rate cuts this year, including the possibility of a 0.50% cut at the September meeting. In other Treasury market news, the Treasury Department announced the composition of its third quarterly funding needs and as expected, kept the amount of coupon issuance unchanged (a larger coupon need would likely pressure yields higher), while continuing to increase Treasury Inflation-Protected Securities (TIPS) sizes. There was significant discussion on the optimal T-bill share, with the Treasury Borrowing Advisory Committee (TBAC) updating its recommendation to an average of “around 20% over time.” LPL Research believes this effectively widens the optimal range to 15–25%. Moreover, this likely confirms our view that Treasury can keep coupon auction sizes unchanged through mid- to late-2025. Related, total outstanding Treasury debt hit $35 trillion, up over 50% since January 2020; to be fair, only $28 trillion is in investors’ hands, with the difference largely held on the Fed’s balance sheet. With budget deficits expected to range between 6% to 8% of GDP over the next decade, outstanding Treasury debt is expected to eclipse $50 trillion by 2034, per the Congressional Budget Office.   

With rate cuts coming and Treasury continuing to fund deficits through shorter-maturity T-bills, rates are likely past peak levels. However, despite the recent fall in rates, we still think the 10-year ends the year between 3.75% and 4.25%.  

Commodities and Currencies:  The Bloomberg Commodities Index closed the week about 1.3% lower. Oil prices stepped into the commodity spotlight, as West Texas Intermediate (WTI) crude saw wild swings in reaction to global events. Chinese demand concerns continued, putting downward pressure on prices early this week. However, an unexpected catalyst was the assassination of the Hamas political leader, causing prices to surge Wednesday. Nonetheless, crude ended over 5% lower near $73 per barrel after plummeting to recent lows on weak U.S. economic data. The dollar index flatlined for most of the week but ultimately closed lower, reaching a four-month low in steep declines on Friday on growth concerns. The Japanese yen battled through elevated volatility to strengthen against the dollar after the BOJ rate hike, finding support from Japanese bond yields reaching multiyear highs. Gold delivered strong gains for its first weekly advance in the last three, supported by soft U.S. economic data and falling Treasury yields, and grazing record highs ahead of Friday’s dip. Silver ended the week slightly higher, while copper was relatively flat over the same period on demand concerns stemming from contracting U.S. and Chinese manufacturing survey data that came in well below estimates. From a broader perspective, the Bloomberg precious metals index ended 1.7% higher this week, while the industrial metals index finished down 0.25%. Soft commodities finally felt some slight relief, capping gains at only 0.5%.   

Economic Weekly Roundup  

Recession Fears? Markets became increasingly nervous about a recession late this week in response to weakening data. The Institute of Supply Management (ISM) reported a decline in the manufacturing survey for July, the lowest since the end of 2023 and a catalyst for the selloff Thursday. Firms added 114,000 jobs in July after a downwardly revised gain of 179,000 the previous month. Downward revisions often signal future weakness. Job gains in July were concentrated in healthcare, construction and in transportation and warehousing. The information sector lost jobs. The unemployment rate rose to 4.3%, driven by a spike in those on temporary layoffs (the Bureau of Labor Statistics reported no discernible effect on the data from Hurricane Beryl). The percentage of those long term unemployed dipped to 21.6%, only slightly higher than 2019 averages. The number of those working part-time for economic reasons rose in July to the highest since the summer of 2021. 

The latest snapshot of the labor market is consistent with a slowdown, not necessarily a recession. However, early warning signs suggest further weakness. The number of those working part-time for economic reasons rose to the highest since June 2021. If the labor market weakens further, markets will likely price in three cuts this year.  

Labor Costs Decelerated in Q2: The Employment Cost Index (ECI), released Wednesday morning, is a broad measure of labor costs and more inclusive than average hourly earnings, which investors got in Friday’s nonfarm payroll report. Labor costs continue to decelerate. In fact, the quarterly change in labor costs for goods-producing industries rose the smallest since 2018. Investors should expect services inflation to decelerate as labor costs ease. In another report, businesses added 122,000 private payroll jobs in July, which was a suggestion Friday’s private nonfarm payroll report would run softer than previous reports. Further insights include wage gains for those switching jobs. As expected, wage gains were stronger for those willing to switch employers. Annual pay rose 7.7% in June for job switchers and 4.9% for job stayers.   

The labor market will experience high churn as long as workers perceive greater opportunities at other companies. Easing labor costs will further dampen services inflation, giving the Fed the opportunity to cut rates at least a couple of times this year, yet remain committed to fighting inflation.

Fed Shifted in July Policy Statement: As we expected, the Fed used this meeting to prepare markets for the upcoming rate cuts, likely at the September meeting. The Committee noted the slowdown in the labor market in a statement released Wednesday. Inflation continues to move into a better balance, and markets will likely respond favorably to this assessment. The Committee will focus on its dual mandate at future meetings. As inflation rates improve and unemployment increases, the Fed can cut rates yet keep the nominal funds rate above the inflation rate. Markets will likely respond favorably to the subtle shift in tone. 

The Week Ahead 

The following economic data is slated for the week ahead: 

• Monday:  S&P Global US Services PMI (July final), S&P Global US Composite PMI (July final), ISM Services Index (July), ISM Services Prices Paid (July), ISM Services Employment (July), ISM Services New Orders (July), Senior Loan Officer Opinion Survey on Bank Lending Practices  
• Tuesday: Trade Balance (June) 
• Wednesday: MBA Mortgage Applications (Aug 2), Consumer Credit (June) 
• Thursday: Initial Jobless Claims (Aug 3), Continuing Claims (July 27), Wholesale Trade Sales (June), Wholesale Inventories (June final) 
• Friday: No major economic releases are scheduled.