Market Note – August 13, 2024

By Hightower Great Lakes on August 13, 2024

Unknowns Will Lead to Further Volatility

Markets digested a lot of information last week. On Monday, the S&P 500 had its largest single-day decline (-3%) since September 2022 and still finished the week flat. The VIX also had its largest ever intra-day jump on Monday, rising 42 points to nearly 67 before closing the day at 38.

The VIX is a volatility index that tracks expected stress in U.S. stocks. Monday’s VIX spike matched levels not seen since the Covid-19 selloff and 2008 financial crisis. But market volatility fell greatly throughout the week, ending Friday 70% lower than Monday’s intra-day high. 

Chart 1: Monday’s Spike in Volatility was the Highest Since Covid and the Financial Crisis[1]

We think that volatility will likely stay elevated throughout the rest of the year. Many uncertainties remain in the market: the Yen carry trade unwind, economic growth around the globe, timing around the Fed’s cutting cycle, the U.S. presidential election, volatility in bond yields, and the natural seasonality around August and September (historically a challenging period for equities).

But growth looks to remain strong, with the Atlanta Fed GDPNow tracker showing 2.9% annualized growth in 3Q.[2]

Initial jobless claims, which have been rising and gaining more attention, came in lower than expected last week at 223K, and July’s ISM Services reading beat estimates, indicating an expanding services sector.

This week we will receive new economic data: July’s retail sales, consumer prices index, and housing data. Markets do not like unknowns, and more data will paint a clearer picture for investors. We continue to watch the data and are looking forward to Fed Chair Jerome Powell’s remarks at Jackson Hole on August 23.

Strongest Earnings Season in Three Years

The second quarter earnings season has taken a backseat amidst economic and international news, but corporations are growing earnings at the highest rate since Q4 2021. As of last Friday, 91% of S&P 500 constituents have reported, and the blended y/y earnings growth rate is 10.8%.

Revenues are also growing at the highest rate in quite some time, 5.2% y/y, the highest since Q4 2022. If this holds, it will mark the 15^th consecutive quarter of positive revenue growth for the S&P 500.

We expected earnings to broaden out, which is coming to fruition this quarter. Nine of the eleven sectors are reporting positive earnings growth, with five seeing double-digit growth: utilities, technology, financials, health care, and consumer discretionary.

Financials and utilities are leading the charge in beating expectations, with the financials sector growing earnings by 17.6% y/y versus expectations of 4.3%, and utilities growing earnings by 20.4% y/y versus expectations of 8.6%.

All five industries within financials have reported y/y earnings growth: insurance 36%, capital markets 28%, consumer finance 27%, financial services 11%, and banks 8%. Despite some fear across the market regarding slowing growth, corporations in the second quarter did quite well.

Fixed Income

As market volatility died down in the second half of last week, the Treasury curve bear flattened, pushing the 2-yr higher by 17 bp and the 10-yr higher by 15 bp, with the 2s10s inverted by -11 bps to end the week. Municipal yields followed Treasuries, higher by 7-21 bps across the curve.

Market participants are now pricing in five 25 bp cuts by the January FOMC meeting. U.S. investment grade spreads ended the week flat at +141 bps after widening 11 bps the week prior. U.S. high yield spreads tightened 11 bps to +391 bps after widening 49 bps the week prior.

U.S. credit ratings improved last week as the main rating agencies issued 30 upgrades and 26 downgrades. Real Estate had the most upgrades relative to downgrades. Money market mutual funds gained $52.7 bn of inflows last week, an 18-week high that lifted money market mutual fund assets to a record high.

Net flows into fixed-income ETFs totaled $3.7 bn, down 33% from the prior week and 35% below the 13-week average. However, this marked the 11th consecutive week of positive net flows.

The Week Ahead

Earnings – Tuesday: HD; Wednesday: CAH, CSCO; Thursday: WMT, AMCR, TPR, AMAT, DE.

Economics –Tuesday: NFIB Small Business Index, July PPI; Wednesday: July CPI, Hourly Earnings; Thursday: Retail Sales, NAHB Housing Market Index, Business Inventories, Import Prices, Export Prices; Friday: Housing Completions, Housing Starts, Michigan Consumer Expectations, Michigan Sentiment.

Return for Selected Indices^[3]

Click here to read last week’s Market Note (8/6).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of August 11, 2024.

[2] Source: Atlanta Fed. As of August 12, 2024.

[3] Source: Bloomberg. As of August 12, 2024.