Nicolet Wealth Management Monthly Newsletter – 9.4.24
Value Outpaces Growth for the Second Straight Month
Economic uncertainty weighed on the stock market early in the month, with the S&P 500 index declining more than -6% in the first 5 trading days only to register a gain for the entire month of 2.4%. During periods of slowing growth, investors typically seek out value stocks for its defensive, dividend, and cheaper valuation characteristics. Last month, value stocks returned nearly 3%, compared to growth stocks performance of 2.2%. Over the last two months, value stocks have outperformed growth stocks by nearly 7%. Investors are turning more skittish on growth stocks because of its extended valuation that’s dependent upon earnings remaining elevated amidst slowing economic activity.
Growth Scare?
August started with investors digesting two weaker-than-expected economic data points. First, overall manufacturing activity declined by the most in eight months on weaker production. The Institute for Supply Management’s manufacturing estimate of production activity fell to the lowest level in 4 years with eleven out of eighteen industries reporting a contraction, including primary metals, plastics and rubber, machinery and electrical equipment. On top of weak production, job growth exhibited modest weakness. The headline jobs number increased by only 114,000 in July, compared to a downwardly revised increase of 179,000 in June. Slower employment growth and an increase in the labor force contributed to a sharp rise of the unemployment rate to 4.3%. In July, the labor force increased by 420,000 with only 67,000 new participants finding work.
Q2 2024 Earnings Season Underscores Strong U.S. Economy
Evidence of solid corporate growth was notable in the latest reporting season. Both sales and earnings topped estimates for the quarter, advancing 5.4% and 12.7%, respectively, and has continued to rise through the end of July. Leading the quarter was the financials sector, exhibiting sales growth of 6.6% and earnings growth of 20.6%, followed by technology and the defensive sector of utilities. Looking ahead, earnings in Q3 2024 doesn’t appear to be as robust, growing only at a 4.2% year-over-year rate, down from 7.5% in early July. However, earnings are expected to return to a double-digit level in Q4 2024 at a rate of 11.1%.
Federal Reserve Exits the Traverse for the Slopes at Jackson Hole
The biggest takeaway from this year’s Jackson Hole Economic Symposium hosted by the Federal Reserve was guidance on rate cuts in September. Fed chair Jay Powell signaled that a rate cut is likely at the September meeting and acknowledged a changing balance of risks between employment and inflation. There’s been a noticeable improvement in the trajectory of inflation, while employment has shown signs of moderating, even to the point of emphasizing that the Fed’s tolerance for labor market weakness has reached its limits. Some of the labor market negativity was tempered though, as data showed the higher unemployment rate was a result of more workers entering the workforce rather than layoffs.
Rates Fall Below 4%
The 10-year Treasury yield declined below 4% for the first time since February 2024, as investors reassessed the trajectory of economic activity and the path of Federal Reserve’s target policy. Weaker economic data points increased the expectation of rate cuts in 2024 from three, 0.25% cuts to four, 0.25% cuts for an implied rate of 4.3% by the end of the year. Bonds with greater interest rate risk performed best for most of the month; however, the bond market eventually followed the success of the equity market. High yield corporate bonds returned 1.63%, while corporate bonds with a better credit rating advanced 1.57%.
Although we believe it to be reliable as of the publication date and have sought to take reasonable care in its preparation, all information provided is FOR INFORMATIONAL PURPOSES ONLY and we make no representations or warranties regarding its accuracy, reliability, or completeness and assume no duty to make any updates in the event of future changes. Past performance may not be indicative of future market results. Any examples used (including specific securities) are generic and meant for illustration purposes only and are not, and should not be interpreted as, offers to buy or sell such securities. To the extent indices are referenced, please note that you are not able to invest directly in an index.
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