Stocks Bounce Back After a Volatile Start to the Week

Photo Credit: Joshua Woroniecki, Unsplash

Weekly Market Recap for September 13th

The week started off volatile, but the S&P 500 finished higher, led by the largest stocks. Large Cap Growth, High Beta, and Momentum outperformed, while the Russell 2000, Large Cap Value, and Low Volatility underperformed. Energy was the worst performer, with oil prices ending the week flat, and financials struggled due to banks’ profit warnings about lower interest income and higher credit losses. Bonds finished the week higher as Treasury yields declined, with Long Duration bonds slightly outperforming.

In the past few weeks, one notable theme has been investors pricing in slower economic growth and aggressive rate cuts. Oil and small-cap stocks are approaching oversold and bonds and defensive sectors overbought.

S&P 500 Index (Last 12 Months)

S&P 500 Technical Composite (Last 24 Months)

Labor Market Holds Steady

Unemployment fell by -0.1% to 4.2%, and nonfarm payrolls rose by +142,000. The August labor market report showed little change, with broader trends unchanged. Unemployment rates across age groups and genders remain higher than earlier this year and last year. Job seekers are taking longer to find employment, driving continued jobless claims to a nearly 3-year high. Job growth is slowing, total employment is flat, and prior months’ estimates are being revised downward.

Despite the limited new information, the overall trend remains concerning. Investors worry the labor market is deteriorating, but the underlying data reveals more nuance. Almost 65% of the increase in unemployed individuals this year stems from a combination of reentrants and new entrants. Individuals completing temp jobs account for 22% of the rise, while permanent job losses account for 19%. While labor demand is softening, the data suggests an increase in labor supply poses a more significant issue. The risk is that the labor market loses momentum, with our U.S. Unemployment Indicator signaling continued upward pressure into early 2025. Our view is that the labor market is finding a new equilibrium (absorbing supply) rather than deteriorating.

US Unemployment

Reason for Unemployment

Inflation Pressures Ease as Food, Energy, & Goods Prices Fall

Headline CPI rose by +0.2% in August, matching the previous month as inflation normalized. Compared to a year ago, CPI increased by +2.5%, the slowest pace since March 2021. Falling prices for food, energy, and goods have contributed to the decline (Figure 2). Food and Energy inflation are well below 2022 levels, and goods deflation remains a tailwind, with prices for Commodities Ex-Food & Energy and New & Used Vehicles falling. Despite the continued decline in headline CPI, data indicates that underlying inflation pressures persist, with Core CPI rising to a 4-month high of +0.3%. The highly-debated Shelter category, which hit a 7-month high, contributed to this rise. Continued price pressures are also evident in Core Services (ex-Shelter), with medical care and vehicle insurance remaining elevated.

Monthly Change Across CPI Categories

Will Inflation Rebound in the Coming Months?

Rate-Cutting Cycle to Begin Next Week

The Fed is shifting focus to the labor market as inflation eases and unemployment rises. This sets the stage for a -0.25% rate cut at next week's FOMC meeting, with more cuts likely in the coming months. However, inflation's seasonality still poses a risk for a market that believes the inflation is under control. Inflation's seasonality is a factor, and inflation has experienced a decline each summer for the past three years. The market responded to this summer's decline by pricing more rate cuts, but inflation may rebound in the coming months if history repeats. Oil, which trades near a 3-year low due to concerns about slowing economic growth and OPEC output increases, could also become a headwind. While seasonality will not change the overall trend of easing inflation, it could cause the market and Fed to question their assumptions.

Look Ahead to Next Week

Next week’s economic calendar includes multiple hard data points, with industrial production releases, retail sales, and housing starts. The Fed holds its FOMC meeting mid-week and releases its Summary of Economic Projections on Wednesday, providing more information about officials’ latest views on the path forward.

The past two weeks' economic data releases included:

ISM Mfg PMI
Actual: 47.2
Consensus: 47.5
Prior: 46.8
Commentary: Manufacturing remains weak.

ISM Services PMI
Actual: 51.5
Consensus: 51.1
Prior: 51.4
Commentary: Slowing, but still signals expansion.

Construction Spending
Actual: -0.3%
Consensus: +0.2%
Prior: +0.04%
Commentary: Private construction remains weak, particularly residential, while public rebounded from June slowdown.

Consumer Credit
Actual: +$25.5B
Consensus: +$11.2B
Prior: +$5.2B
Commentary: New all-time high

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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