Market Update

It was a doomy few days on Wall Street, with stocks falling, bond yields dropping, and oil prices taking a significant hit. Let’s take a quick look at the key developments and what they mean for investors.

The key takeaway is that while we will have tumultuous weeks like this every once in a while, the market has performed exceptionally well this year. I believe we will have a solid end to the year amid falling interest rates and as we gain more political certainty in the US following the November elections.

Markets Take a Tumble

U.S. stock indexes posted some of their sharpest declines in over a year. The NASDAQ led the way down, dropping nearly 6% by Friday’s close, followed by the S&P 500, which fell over 4%, and the Dow, down almost 3%. Technology stocks, in particular, were hit hard as concerns grew about the short-term profit potential of artificial intelligence. After months of optimism around AI, the market is reassessing how soon these investments will deliver results, leading to a broad sell-off in the sector.

Job Growth Misses Expectations

In addition to market woes, the latest jobs report was a mixed bag. The U.S. economy added 142,000 jobs in August, a slight improvement from the previous month but below the forecast of 160,000. Adding to the uncertainty, job gains for June and July were revised down by a combined 86,000. While the labor market is still growing, it’s showing signs of slowing down. This will be an essential data point for the Federal Reserve as it prepares for its mid-September meeting, where the focus will be on whether to cut interest rates to support the economy.

Bond Yields Fall as Rate Cut Likely

In the bond market, yields fell sharply last week, reflecting growing expectations of an interest rate cut from the Federal Reserve. The 10-year U.S. Treasury yield dropped to 3.72%, its lowest level since June, after sitting at 3.92% just a week earlier. Lower bond yields are often a signal that investors are moving towards safer assets amid uncertainty, and they suggest that borrowing costs for businesses and consumers could soon decline if the Fed cuts rates at its upcoming meeting.

Oil Prices Dip to New Lows

It wasn’t just stocks that suffered last week—oil prices also saw a significant drop. U.S. crude oil fell nearly 8%, closing the week at around $68 per barrel, its lowest price in over 14 months. Just a few weeks ago, oil was trading above $80. The drop is largely due to concerns about weakening demand in the U.S. and China, the world’s two largest oil consumers. For energy investors, this drop represents a challenging shift, though for consumers, it could mean some relief in gas prices in the near term.

Volatility Spikes

As the market slid, volatility surged. The Cboe Volatility Index (VIX), which tracks market volatility expectations, jumped by 49% over the week, closing Friday at around 22. While this is a significant increase, it’s still well below the levels seen in early August when volatility spiked to nearly 39. The rise in volatility reflects growing uncertainty in the market as investors weigh risks across stocks, bonds, and commodities. It’s a clear sign that caution is returning to the market after a relatively calm period earlier this summer.

Small-Cap Stocks Struggle

Small-cap stocks had an especially tough time last week. The Russell 2000 Index, which tracks small-cap companies, dropped nearly 6%, underperforming its large-cap counterparts. Small-cap stocks are often more vulnerable to economic uncertainty and market volatility, and this week was no exception. Investors shifted their focus away from smaller, riskier companies, opting instead for larger, more stable firms.

Earnings Snapshot: Utilities Lead the Way

Amid all the market turbulence, the recently completed second-quarter earnings season provided a few bright spots. Utilities led the way with a 21% earnings increase compared to the same period last year, marking the strongest growth of any sector. Overall, earnings for S&P 500 companies rose by 11.3%, the highest since the fourth quarter of 2021. While the broader market faced challenges, sectors like utilities showed resilience, highlighting the value of diversification during uncertain times.

Looking Ahead: Inflation Data in Focus

This week’s key event will be the release of the Consumer Price Index (CPI) report on Wednesday. The Federal Reserve will closely watch the inflation data as it prepares for its September 18 meeting, where officials decide whether to cut interest rates by 25 or 50 basis points. The most recent CPI report showed an annual inflation rate of 2.9%, the first time inflation has dropped below 3% since early 2021. A continued decline in inflation would give the Fed more flexibility to ease rates, which could help stabilize markets.

Final Thoughts

It was a challenging week for investors, with sharp stock declines, rising volatility, and mixed economic data adding to the uncertainty. As we look ahead, critical decisions by the Federal Reserve and further economic indicators like the CPI will play a crucial role in determining the market’s next move. Investors are keeping a close eye on the data and preparing for an exciting year-end, especially with the upcoming election.

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Luke Abbott, CFA