By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Markets assumed a risk-off posture to start September as stocks fell sharply, investors bid up bonds and crude oil prices fell to their lowest levels of the year. Month-to-date, the S&P 500 (SPX) has fallen more than 4%, pulled lower by technology, communication services and commodities stocks. In contrast, traditionally defensive sectors—consumer staples, utilities, real estate and healthcare—are down less than the broader market, with the staples sector actually managing a small gain. SPX’s 4% loss marked its worst weekly return in nearly a year and a half. Over the same period, the technology-heavy NASDAQ Composite fell 5.8%, while the blue chip-focused Dow Jones Industrial Average finished 2.9% lower. Last week’s volatility was particularly pronounced for small-cap stocks, which fell significantly more than large caps. The Russell 2000, a small-cap stock index, fell nearly 6%, essentially erasing all the ground that small caps had gained on large caps quarter-to-date.
If we drill down a bit deeper, the weakness in technology stocks was heavily influenced by semiconductor companies. A few key companies in the industry have reported earnings and forward guidance that have failed to live up to investors’ lofty expectations. Semiconductor companies have become particularly important to investors in this market; first, because they’ve steadily led the market to new highs, and second, because they are seen as an indicator of how the artificial intelligence-focused growth story is holding up. The large run-up in these stocks (and the market as a whole) has led to stretched valuations, and stretched valuations have left some investors wary of any potential signs that growth is slowing.
The primary catalyst for the weakness in semiconductor stocks was a disappointing report from Broadcom Inc., a company that is seen as a bellwether for future AI-related chip demand. The week prior, Nvidia (by far the most closely watched company for the AI economy in this market) reported results that beat consensus expectations, but still disappointed some investors given that shares have more than doubled in 2024. Now, there is an emerging narrative that the significant investments in AI being made by corporations may not pay off in the form of promised productivity gains. This would be a particularly negative development because investors have given a pass to many management teams who have reported subdued profitability under the guise of investments in AI. By the time the week was over, the PHLX Semiconductor Index had lost nearly 12%. The price action last week may be a signal that investors are preparing for a reset of growth expectations, or at least a pause so that earnings can catch up to the price gains we’ve seen over the past two years. As much as AI hype has contributed to the market so far in 2024, there is real risk that disappointment around its realized impact could undo a good portion of those gains.
Another area of focus for investors was the U.S. labor market, with a plethora of data showing that the employment situation is clearly softening. The Labor Day-shortened week (the irony not lost on us) saw reports on the number of job openings in the U.S., the ADP employment report, initial jobless claims and labor costs before rounding out the week with Friday’s nonfarm payrolls report. The number of job openings fell to 7.7 million, the lowest level seen this year, while the ADP private employment report indicated that the economy added just 99,000 jobs, the lowest level since 2021. The most anticipated report of the week was the nonfarm payrolls report, which showed that job gains came in at 142,000, well below the 165,000 expected. At the same time, the prior two months’ figures were revised lower by nearly 90,000 jobs, bringing the three-month average to a sluggish 116,000, well below the 334,000 averaged over the past three years.
There were some positive aspects of last week’s data, however. The unemployment rate, for instance, decreased slightly from 4.3% to 4.2%. While this is still higher than last year’s low of 3.4%, it remains significantly below the long-term average of 5.7%. Also, the recent rise in the headline unemployment rate is largely due to an increase in workers joining the labor pool, not because of an increase in job losses or layoffs. Finally, while the 142,000 jobs added last month fell short of expectations, they are consistent with the 10-year pre-pandemic average of around 180,000. This suggests that, although the labor market is weakening, we have not reached net job losses or recession-like employment conditions.
The combination of weak employment data and weaker stocks meant that bond yields moved lower across the board. And, for the first time since 2022, the closely watched 10-year to 2-year U.S. Treasury yield curve un-inverted. Unfortunately, an un-inversion of the yield curve tends to coincide with the initial phases of a Federal Reserve (Fed) rate-cutting cycle, which also coincides with a softening economy.
Ahead of the Fed’s September 18 policy meeting, policymakers have made it clear that they are more focused on the labor portion of their dual mandate, rather than inflation. Last month, Fed Chair Jerome Powell went on the record saying, “We do not seek or welcome further cooling in labor market conditions.” My expectation is that the Fed will go ahead with a 0.25% cut later this month and likely follow that up with an additional 0.25% cut before the end of the year. The question now is whether the Fed can maneuver policy in such a way that keeps the economy above water while also keeping inflation on a path lower. Investors will continue to keep a close eye on inflation indicators as they look to the Fed to signal continued support for the labor market and economic growth.
This week’s economic calendar is headlined by inflation data, with the Consumer Price Index (CPI) on Wednesday followed by the Producer Price Index (PPI) on Thursday. Both reports are expected to show slight but steady easing of price pressures, further supporting the Fed’s case for rate cuts in the coming weeks and months. Also, this week brings updates on consumer trends and additional labor market data. Initial jobless claims could be particularly impactful this week as investors and economists look for signs of continued deterioration in the labor market.
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
| MONDAY, SEPT. 9 | ||||
| 10:00 am | Wholesale Inventories |
July |
0.3% |
0.2% |
| Consumer Credit |
Aug. |
$12.0B |
$8.9B |
|
| TUESDAY, SEPT. 10 | ||||
| 6:00 am | NFIB Optimism Index |
Aug. |
93.6 |
93.7 |
| WED., SEPT. 11 | ||||
| 8:30 am | Consumer Price Index (CPI) y/y |
Aug. |
2.6% |
2.9% |
| 8:30 am | Core CPI y/y |
Aug. |
3.2% |
3.2% |
| THURSDAY, SEPT. 12 | ||||
| 8:30 am | Initial Jobless Claims |
Sept. 7 |
225,000 |
227,000 |
| 8:30 am | Produce Price Index (PPI) y/y |
Aug. |
— |
2.2% |
| 8:30 am | Core PPI y/y |
Aug. |
— |
3.3% |
| FRIDAY, SEPT. 13 |
|
|||
| 8:30 am | Import Price Index |
Aug. |
-0.3% |
0.1% |
| 10:00 am | Consumer Sentiment (preliminary) |
Sept. |
68.5 |
67.9 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market