Market Note – September 10, 2024

By Hightower Great Lakes on September 10, 2024

Choppy Markets on Growth Concerns?

The S&P 500 closed in the red across all four trading days last week, ending the week down -4.25% for its worst week since March 2023. We expected the typical September seasonal volatility, but adding in the unknowns of Fed policy and the tight upcoming election, there are too many crosscurrents at play. Especially since the S&P 500 was up 18% YTD – recall, the long-term average total return for the S&P 500 is 7.7% each year.

Growth concerns have come back into the market, but the data continues to show a strong economic backdrop. The second preliminary revision for 2Q GDP was moved higher to 3%, up from 2.8%, and the Atlanta Fed GDPNow tracker is showing 2.5% annualized growth for the third quarter.

This week we will receive the August inflation data – CPI and PPI which we expect to show continued progress. The Fed has pivoted away from fighting inflation given this progress and is now focused on the labor market – which has become more in balance.

Across the board, jobs have seen a slowdown (NFP, JOLTs, ADP, initial claims) but are far from recessionary levels. Initial Claims are the forward-looking method for jobs and the 4-week moving average is at 240K which remains well below the 350K-375K during recessions.

Among all the data surrounding the labor market, the one positive call out is that wages remain strong. ADP showed 4.8% wage growth and 7.3% growth if a person switches jobs. NFP posted 3.8% average hourly earnings.

JOLTs data still shows 1 job opening for every 1 person unemployed. We remain optimistic on the consumer due to jobs, wages, lower inflation, commodity prices and lower interest rates. 

Chart 1: Job Creation has Slowed, But Layoffs Remain Muted[1]

Market Participation Grows

The third quarter has seen a 180-degree shift in market participation. Utilities are now leading the charge up nearly 20% year-to-date, followed by financials, communication services, and consumer staples all up over 15%.

Technology peaked in mid-July at +23% and has since fallen sharply, now up only 5% YTD. The real estate sector was down as much as -10.8% in April and has seen a resurgence due to pushed-forward rate cut expectations, now up nearly 9% YTD.

The rotation has been healthy, as tech accounted for 95% of the S&P 500 gains in the second quarter. Cyclical sectors have been beneficiaries of changing rate cut expectations, and sectors like staples and health care have rebounded.

Housing is still one of our favorite long-term themes, and stocks like DR Horton (DHI) and Builders FirstSource (BLDR) have benefited, up 32% and 21% respectively in the quarter.

Housing remains one of our favorite themes this year, and we recently discussed it as one of our favorite long-term themes. Increased volatility and quickly changing expectations will likely lead to further broadening into year-end.

Chart 2: Utilities Lead all Sectors YTD as Technology Declines[2]

Fixed Income

U.S. Treasury Yields fell sharply last week as the 2-, 10-, & 30-year yields were down 27, 20, & 18 bp respectively. As a result, the 2Y/10Y spread closed positive for the first time since July 2022. Muni’s followed Treasuries lower as yields were down 6-8 bps across the curve.

The week following Labor Day is historically one of the busiest debt issuance weeks of the year, and last week was no exception. Around 60 issuers sold over $80 billion of investment grade credit, a new Labor Day week record and the fifth-largest weekly issuance volume recorded.

The issuance bulk came as the corporate’s aim to lock in borrowing costs while yields are relatively low as the average blue-chip yield sits under 5%.

U.S. investment grade spreads widened 2 bps last week to +137, and U.S. high yield spreads widened 21 bps to +386. Spreads are still well below recessionary levels, which near +225 bps for investment grade and +600 bps for high yield in times of stress.

U.S. credit ratings improved last week as the main rating agencies issued 27 upgrades and 17 downgrades. Financials led with the most upgrades while Communications had the most downgrades.

The Week Ahead

Earnings – Monday: ORCL; Thursday: ADBE, KR.

Economics – Monday: Wholesale Inventories, Consumer Credit; Tuesday: NFIB Small Business Index; Wednesday: August CPI, Hourly Earnings; Thursday: August PPI, Initial Jobless Claims, Continuing Jobless Claims; Friday: Michigan Consumer Expectations, Michigan Sentiment.

Return for Selected Indices^[3]

Click here to read last week’s Market Note (8/27).

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.

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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 September 6, 2024.

[2] Source: FactSet. As of September 6, 2024.

[3] Source: Bloomberg. As of September 9, 2024.