Large fluctuations in the US markets last week left many investors with questions as to what is driving these large swings and asking the question, “Should I be concerned or make changes?”. This blog examines current market fundamentals that can affect the markets and explains how recent volatility is both normal and expected, and the best course of action is to stay in the market and follow the course of your financial plan.

The most dramatic down-market day for the S&P 500 in recent months, Monday August 5, was largely influenced by developments in Japan, specifically concerns over the Bank of Japan’s (BOJ) monetary policy shifts. The BOJ’s unexpected move to adjust its yield curve control policy, allowing for higher interest rates, sent ripples through global markets, including the U.S. This decision raised fears of tightening financial conditions globally, contributing to a sell-off in U.S. equities as investors anticipated broader impact.  The heightened volatility in Japanese markets underscored the interconnectedness of global financial systems, where policy changes in one major economy can significantly influence market sentiment across the world​​. This single factor is believed to have been the largest contributor to the decline of over 3% in the S&P 500, 2.6% in the Dow Jones Industrial and 3.4% in the NASDAQ composite that day.

Also contributing to market changes, the most recent U.S. jobs report, covering July 2024, showed that the labor market is continuing to cool. The economy added 114,000 nonfarm payroll jobs, significantly lower than the monthly average of 215,000 over the past year. This slower growth, coupled with a rise in the unemployment rate to 4.3% (the highest since October 2021), suggested that the labor market is losing some momentum. Despite the slowdown, job gains were observed in sectors such as healthcare, construction, transportation and warehousing. However, the information sector experienced job losses, and other major industries showed little change in employment. However, it is important to note that there was not an increase in lay offs, and, in part, the unemployment rate was increased by new individuals entering the workforce faster than new jobs are being created.

Wage growth also decelerated, with average hourly earnings rising by just 0.2% month-over-month, reflecting a yearly increase of 3.6%, down from 3.8% in June. This moderation in wage growth indicates easing inflationary pressures, which could influence the Federal Reserve’s upcoming decisions on interest rates. The Fed has signaled the possibility of rate cuts this fall, especially as the labor market normalizes and inflation continues to ease​.

The Federal Reserve has played a significant role in the recent market swings as investors closely monitor its monetary policy decisions. The Fed’s decision to hold interest rates steady for much of 2024, despite mounting evidence of a cooling economy, has been a critical factor in the market’s volatility. Some market analysts argue that the Fed might be “behind the curve” in cutting rates, given the signs of slowing economic growth, easing inflation, and the previously mentioned rising unemployment rates. It has been suggested that the lack of movement is motivated by concerns over rekindling inflation, but that a rate cut may be necessary to sustain economic momentum. Fed officials, including Chair Jerome Powell, have emphasized the need to balance inflation control with economic support, signaling that any future rate cuts will be contingent on further data. This has left markets in a state of anticipation, with each new economic report influencing expectations and contributing to the recent swings​.

In addition to the effects of rates and global monetary policy, volatility in markets can be triggered by fluctuations in trading volumes in both U.S. and international markets. In the U.S., markets have seen a blend of high and low trading days, reflecting investor reactions to various economic indicators and corporate earnings reports. For example, U.S. stock markets experienced a rally early in the period, followed by a decline as traders adjusted their positions after sharp price increases. Volumes surged during days of significant market movement, particularly around key economic data releases and corporate earnings announcements. Earnings reports continue to be healthy overall, around 11-12%.

Internationally, trading volumes have similarly been influenced by a mix of factors, including geopolitical tensions and global economic concerns. Markets in Asia and Europe saw increased activity as traders responded to economic reports and central bank actions, such as interest rate decisions. Overall, while trading volumes have been robust, they have been characterized by periods of volatility, driven by a mix of economic data and investor sentiment​.

As we move through 2024, the manufacturing sector is encountering a more challenging environment. The most recent data indicates a slowdown in manufacturing activity, reflecting broader economic cooling and weakening demand in both domestic and international markets. Key manufacturing indices, such as the ISM Manufacturing Index, have shown contraction in several months of 2024, pointing to reduced production levels and a cautious outlook among manufacturers. This trend is influenced by continued supply chain disruptions, although these have eased compared to the peak of the pandemic.

Additionally, U.S. manufacturers are grappling with tighter financial conditions, as higher interest rates have made borrowing more expensive, impacting investments in new technology and capacity expansion. Despite these challenges, there are pockets of strength, particularly in industries linked to energy transition and infrastructure, where government spending and private investment remain robust. Overall, the manufacturing sector is navigating a complex environment of slowing growth, inflationary pressures, and evolving demand patterns, making adaptability and innovation crucial for maintaining competitiveness​.

As we examine all the previously mentioned economic factors, it is most important to note that the equities markets are exhibiting typical fluctuations associated with normal market cycles. Although the magnitude of the recent correction has sparked debate among analysts, markets experience periodic corrections—defined as declines of 10% or more from recent highs. Market corrections are common, and while the depth and speed of the latest downturn may seem steep, it aligns with patterns seen in previous economic cycles, particularly during periods of monetary tightening. When compared to past cycles, the current correction fits within the broader spectrum of market behavior, underscoring the cyclical nature of equities​. What differentiates current market conditions is the availability of information, whether accurate or inaccurate, which can create a negative feedback loop and affect consumer confidence. When consumers begin to worry and behaviors shift as a result, conditions can be amplified by emotional investments decisions. As always, the most important action investors can take is to have a strong, long-term financial plan that supports a life by design and to adhere to that plan regardless of short-term changes in the markets.

Sources

https://humancs.com/august-2024-jobs-report-amp-industry-update/

The Employment Situation – July 2024 (bls.gov)

July 2024 Jobs Report: 114,000 Jobs Added | J.P. Morgan (jpmorgan.com)

Daily Market Summary (nasdaqtrader.com)