As we forecast in June, the US stock market to enter a period of weakness with stock prices declining during the summer after the major indices had a solid rally in the first half of 2024.  The reasons for summer weakness vary from one year to the next, but the consistent pattern is unmistakable.  This summer, the rationale given why investors were reducing stock allocations included disappointment the Feds have not lowered interest rates, concerns about the wars in Israel and Ukraine, stocks that were overpriced to their earnings, and a weak housing market.  All of these concerns were valid from the start of the year but institutions took action as the “A” team left for summer vacations leaving the hard choices to their “B” team.

The major indices began a declining trend on July 10, then bottomed out around August 7, and are now in a positive up trend.   The indices are still below the yearly highs reached in July and offer new buying opportunities.   

Despite strong earnings growth in the tech sector, many of the top-performing stocks were also caught in the down draft of the market.  Nvidia (NVDA) had soared over 173% YTD thru July 10 and then during the selloff plummeted -25.5% before bottoming on August 6.  During this same period, Google (GOOG) declined -by 16.6% and Meta Platforms (META) dropped by 15.25% and Apple (AAPL) dropped -by 10.18%.  Since August 6, the tech sector and most tech leader stock prices have recovered most of the summer decline but remain below their year highs reached in July.

OUTLOOKS FROM MANUFACTURING AND NON-MANUFACTURING INDUSTRIES.

This morning the Federal Reserve of Philadelphia released its Philadelphia Fed Manufacturing Index indicating that US manufacturing plummeted to -7 in August 2024.  This is down from a three-month high of 13.9 in July and far below forecasts of 7, marking the first contraction since January. 

The index has been contracting from June 2022 until January when the manufacturing industry began its first uptick in 18 months.  The Federal Reserve of Philadelphia provided this commentary:

• “Manufacturing activity in the region softened overall, according to the firms responding to the August Manufacturing Business Outlook Survey. The survey’s indicators for current general activity, new orders, and shipments all declined, with the former turning negative. The employment index suggests declines in employment overall. Both price indexes indicate overall increases in prices and remain near their long-run averages. The firms continue to expect growth over the next six months, but expectations were less widespread this month.”

As manufacturers were reporting bigger declines in new orders, and shipments, responses from non-manufacturing businesses were mixed.  The Federal Reserve of Philadelphia provided this commentary:

• “Nonmanufacturing activity improved somewhat but remained weak, according to the firms responding to the August Nonmanufacturing Business Outlook Survey. After negative readings last month, the indexes for general activity at the firm level and sales/revenues turned positive but are below their respective long-run averages, and the new orders index rose to a near-zero reading. The firms continued to report a decline in full-time employment, on balance. Both price indexes continued to indicate overall increases in prices but remained near their long-run averages. The respondents continue to expect growth over the next six months at their own firms, but expectations are subdued.”

What Does This Mean to Me?

As the stock market began to slide during the summer months, it appears businesses are also experiencing a slowdown in new orders, sales, and shipments.  However, businesses from manufacturers and non-manufacturers both indicated they anticipate growth in activity in future months.  The source of slowing business activity is consumers.  People are spending less due to the combination of the end of trillions of dollars in government subsidies and a significant rise in prices.  I am reading more frequently about households being pinched with their budgets and changes in spending due to the rapid rise in prices.  The Federal Reserve Bank of Dallas released today its monthly Texas Manufacturing Outlook.  Their report identified the sausage as a possible gauge of a slowing economy.  They stated:

• “As the economy weakens, we are seeing modest growth in our category of dinner sausage," the comment reads. "This category tends to grow when the economy weakens, as sausage is a good protein substitute for higher-priced proteins and can ‘stretch’ consumers’ food budgets."

Despite the drumbeat of bad news, institutional investors returned to the stock market.  The major indices including the S&P 500 began their rebounded on August 6 and now nearing all-time highs. Yesterday, the Dow Jones Industrial Average (DJIA) closed at its highest point in history at 41,250.50

The S&P 500 has cleared its 20, 50, and 200 Day Moving Averages (DMA) meaning that its momentum is now building faster every day.  It is a positive indicator that the index did not breach its 200 DMA and has bounced solidly since its low point reached on August 6.

We maintain our favorable rating on the US economy and stock market.  Investors may get cautious with new investments as the Presidential election nears.  Holiday sales will provide insights into consumer sentiment as their true feelings will be indicated by their spending on loved ones.  Count on the Federal Reserve to provide some boost to the economy and stock market when they lower rates. 

Let us know your thoughts on this Update.  More importantly, let us know how we can help you and your family reach your financial goals.