Has the Fed Waited Too Long? The Market Thinks So.

Insights from the Greenwood Capital investment team: Walter Todd , John Wiseman , Mark Pyles , John Decker, CFA , Justin Bartanus .

Jerome Powell spoke after the FOMC meeting on Wednesday. Interest rates remained in their current target range of 5.25% to 5.5%, however, Powell noted that the labor market has cooled, significant progress has been made on inflation, and that Fed rate cuts could be on the table as early as September. This was initially met with a market rally at the prospect of loosening financial conditions on the near horizon.

However, that has been largely overshadowed by the ISM surveys and labor market data that followed late last week, driving the markets to severely react with the belief the Fed may have waited too long already.

We will be watching this market development closely. Be sure you are following us on LinkedIn to stay up-to-date!

• Last week we got our first look at Q2 GDP, which was better than expected at 2.8%, and PCE which was basically in line with expectations
• July Nonfarm Payrolls disappointed, coming in at 114K vs 175K expected, with unemployment rate jumping up to 4.3% from 4.1% last month.
• ISM Manufacturing surveys conveyed a troubling decline in the new orders and employment items, both down meaningfully from last month and driving the headline number down to 46.8 from 48.5 last time
• Pending Home Sales joined the other housing data in showing constrained activity in being down 7.8% y/y while housing prices continue to rise

Takeaways:

The economy is slowing but growth appears to be holding up thus far. However, the labor market data is now definitively softening as the constrained financial conditions are starting to take a significant toll. We are paying close attention to measures of consumer behavior as consumers have been particularly resilient up until this point, but signs of strain are getting more prominent.

• The S&P 500 pulled back again last week falling just over 2%, bringing the last two weeks total to -4.7%.
• Smaller cap stocks were hit even harder on the week, with the S&P 600 falling more than 5%.
• As the market moved to more defensive names, Utilities, Real Estate, and Staples relatively outperformed while Tech and Consumer Discretionary underperformed.
• The ex-US world had a good start to Q3, but underperformed last week as Japan saw a large hit following their rate raise and Canada gave back QTD gains.
• With just over 75% of the S&P 500 reported, 57% have beat on the top line while 78% have beat on the bottom line. However, this is largely being overshadowed by the market reactions, many of which are outsized downward moves from failing to meet lofty expectations.

Takeaways:

The market continues to be volatile as it attempts to price in a US slowdown, a noisy political environment both domestically and abroad, as well as heightened geopolitical tensions.

We have felt for some time that the market had grown too “top-heavy” and would correct; however, the speed at which this has happened is surprising (note the VIX hit 65 this morning – 8/5/24). We remain balanced and think that though unnerving, market volatility can open up price dislocations and potential investment opportunities.

• Bond yields were lower by nearly 40 basis points over last week with most maturities finishing below the 4% level.
• Credit spreads are moving wider in sympathy with the equity market.
• The front end of the curve continues to roll over, with the 2/10 inversion rapidly bleeding away after more than two years of that condition.

Takeaways:

The bond market rallied sharply this week after Jerome Powell set the stage for an upcoming cut in the Federal Funds Rate. Subsequent economic data suggests the Federal Reserve is already too late. The monthly jobs report, reported Friday, further solidified the momentum.

This econ data week is a very light week with July PMI and ISM Services, Consumer Credit, and Initial Claims data. Earnings continue to be in focus as we hear from names that give us a better look at the status of the economy including Caterpillar, Eli Lilly/ Novo Nordisk, The Trade Desk, Uber, Airbnb, and others.

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This commentary represents the opinions of Greenwood Capital Associates, LLC and is for informational purposes only. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. It is not intended as a basis for the implementation of any particular investment strategy or any decision to purchase or sell. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment adviser.