Weekly Market Update: August 12, 2024

Volatility in the equity market spiked at the start of August, historically one of the weakest months of the year for stocks. The increased anxiety among investors was prompted by a series of uninspiring July economic reports, including weak labor market data and a further contraction in manufacturing activity. This drove investors out of many growth stocks and into safe-haven securities.

The July jobs report showed a notable slowing in labor market conditions. The nation added an estimated 114,000 jobs last month, well short of the consensus forecast of 185,000, and that total was accompanied by a downward revision to the prior month’s figure and an increase in the unemployment rate to 4.3%. It also should be noted that initial and continuing jobless claims are steadily rising, with the former jumping to an 11-month high at the end of July.

The Federal Reserve is nearing an inflection point on monetary policy. The Federal Open Market Committee (FOMC) kept the federal funds rate steady at 5.25% to 5.50% during the July meeting, but did open the door wider for a rate cut at the next meeting in September. With inflation moderating, but still running above the Fed’s target rate, and the labor market and overall economy slowing, trying to stave off a future recession may be a bigger problem for central bank policymakers when they reconvene in September. Wall Street is now predicting as many as three interest-rate cuts by year’s end.

Meantime, second-quarter earnings season has produced favorable results. With 75% of the S&P 500 companies having reported, the average profit growth forecast is now in the neighborhood of 12%. However, it should be noted that with the price-to-earnings multiple for the Index elevated coming into reporting season, those companies that have delivered disappointing results and/or lowered their prognostications (e.g., Intel Corp.) have felt the wrath of Wall Street.

Conclusion:The CBOE Volatility Index (or VIX) spiked dramatically higher on worries about a weakening U.S. economy. With this backdrop, we think a portfolio led by stocks of high-quality companies that have a long record of generating steady profits and cash flows, while maintaining their dividends during difficult economic times is warranted. 

Source: ValueLine.com