The Federal Reserve’s Open Market Committee (FOMC) moved from a credit-tightening policy to a credit-neutral, wait-and-see position about a year ago and has been monitoring the data ever since. It’s been trying to gauge the effectiveness of its prior eleven interest rate hikes in reducing demand enough to bring inflation down to its 2% target rate. The Fed has been walking a tight rope trying to slow the economy enough without causing a recession or re-igniting inflation. Most economists and market participants believed the FOMC was doing an effective job, and the consensus opinion has been for a soft-landing, or even a no-landing economic scenario. That all changed last Friday with the release of the July jobs report.
The Bureau of Labor Statistics (BLS) reported on August 2nd, that nonfarm payrolls increased in July by 114,000 and, while solid, it was much less than expected. Additionally, the unemployment rate jumped to 4.3%, the highest level since 2021. Initial claims for unemployment benefits increased to the highest level since August 2023 and continuing claims rose to the highest level in almost three years. The ISM Manufacturing Index came in at 46.8% in July vs. 48.5% in June, the fourth consecutive month that manufacturing has contracted. Typically, anything under 50% is considered to be contractionary and above 50% expansionary.
Markets, fearing a perfect storm due to already lofty equity valuations, reacted viscerally to the possibility of an earnings slowdown. Equities sold off, with the largest drops in the most economically sensitive sectors including consumer discretionary, information technology, energy, industrials, and financials. Consumer staples, real estate, utilities, and health care all gained ground during the sell-off, once again proving the power of broad diversification. Small-cap stocks, as measured by the Russell 2000 index, were the worst performers on the day. Additionally, the so-called Magnificent Seven are not looking so magnificent currently, having dropped significantly since peaking in mid-July.
Prior to Friday’s release, the consensus opinion was that the Fed would cut the fed funds rate by 0.25% at its September meeting. That opinion is now a 0.50% rate cut. Will the Fed pre-empt the consensus by announcing a rate cut prior to its September meeting? It’s certainly a possibility. Markets constantly fluctuate from over-valued to under-valued trying to find equilibrium. One thing is certain and that is trying to successfully time these inflection points is virtually impossible. There is an old saying that its time in the market, not timing the market, that achieves permanent wealth creation. These are the same companies today as they were a month ago and while their revenue and earnings may slow as many obviously fear, they will recover and continue their permanent upward march in valuation, despite any temporary pullback in prices. For goals-based, plan-driven investors it’s just another day at the office.
Stay committed.
