While the August market slide continued during the second half of the month, a rally over the past few days has not only reversed the market course but has erased much of the losses from earlier this month.
The story of the day continues to be the Federal Reserve (the Fed) and predicting their course of action. The markets are viewing economic data through the lens of interest rate policy. That is, positive data makes it more likely that the Fed will continue to raise rates; conversely, negative data makes a “pause” more likely. Since rising interest rates increase borrowing costs and negatively impact market returns, any hint of a rate hike can send markets lower.
A few key points from earlier this week:
- Updated Gross Domestic Product (GDP) numbers for the second quarter showed the U.S. economy expanded at 2.1%, lower than the preliminary estimate of 2.4%.1 GDP is widely used to measure economic growth, so a revision down suggests a slowing economy.
- The most recent ADP National Employment report showed private payrolls increasing by 177,000 jobs, missing estimates of 195,000.2 Another report showed an uptick in layoffs of existing workers. Taken together these reports suggest a slowing labor market.
What was the result of this negative economic news? On August 30th the NASDAQ Composite Index (NASDAQ) closed at its highest level since August 1st and the S&P 500 Index reached its highest point in 3 weeks. Market expectations for a Fed interest rate pause stood at 89%, meaning the market thinks it is highly likely that the Fed will not raise rates at their next regularly scheduled meeting in mid-September.
In inflation-related news, the Personal Consumption Expenditures Price Index, the Fed’s preferred gauge of inflation, held steady for the month of July.3
Despite some signs of a slowing economy, bright spots do remain. Consumer spending, the single largest driver of the economy, exceeded expectations for the month of July. Sales rose by 0.7% in July, following an upwardly revised gain of 0.3% for June.4 Reviewing returns for the second half of August, the markets posted mixed results. As of market close on August 31st, the Dow dropped 224 points (0.64%), the S&P 500 rose 70 points (1.57%) and the NASDAQ Composite Index (NASDAQ) grew by 404 points (2.96%).
1,2 www.reuters.com “Wall Street ends higher as economic data fuels rate-pause bets” August 30, 2023
3 www.seekingalpha.com “S&P, Nasdaq, Dow open in the green after yet more economic data on labor, inflation” August 31, 2023
4 www.horsesmouth.com “Capital Market Indicators for August 30” August 30, 2023
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