Fixed Income & Equities Markets Week in Review

“Back to School” season got underway this week, as market participants returned from the long holiday weekend and the wind down of summer vacations. Stocks moved lower on Tuesday, as investors pondered the seasonal headwinds that could be approaching.

September is historically the most challenging month of the year for the stock market. Going back to 1928, according to Goldman Sachs the S&P 500 generated an average return of -1.17% during September. Adding to this, the stock market has delivered impressive gains off of the April 8th low (Dow +21.8%, S&P 500 +30.3%, Nasdaq Composite +40.9%, Russell Mid Cap Index +28.7%, and Russell 2000 +35.1%). This spectacular 5-month rally has pushed the market’s valuation to extended levels, with the forward 12-month price/earnings (P/E) multiple now at 22.4x. This is well above the 5-year average of 19.9x and the 10-year average of 18.5x. Periods of elevated valuation after big rallies make the market vulnerable to drawdowns if there are disappointments relative to expectations—and particularly during more seasonally volatile stretches. Although stocks reversed course and delivered gains on both Wednesday and Thursday (with the S&P 500 setting a fresh all-time high close on Thursday), volatility will bear watching over the next few weeks.

This was a busy week for economic data releases, so investors had much information to consider. The most focal information included: 1) the August Institute for Supply Management (ISM) manufacturing index, which came in at 48.7, below an expected 49.2; the good news was that new orders were back in expansion territory (above 50); 2) the July JOLTS job openings, which came in at 7.18 million, missing expectations of 7.37 million and the lowest since September, 2024; 3) the August ADP private payrolls, which printed at 54,000, below an expected 85,000 and the prior month’s downwardly revised 104,000; and 4) the August ISM services index, which came in at 52.0, ahead of an expected 51.0 and up from July’s 50.1 (and with a good improvement in new orders). These data were a lead-in to the most anticipated information of the week—an update on the labor market.

The August employment report capped off the week on Friday. Wall Street was looking for an increase of 75,000 jobs last month. Unfortunately, the August non farm payrolls report showed that a disappointing 22,000 jobs were added last month. In addition, June and July data on job additions were revised; the net revision over the two months was -21,000. The combination of these three months of weakening data suggests that the pace of job growth has slowed notably. It also meaningfully increases the likelihood that the Federal Reserve (Fed) might lower interest rates when it meets later this month. There has been ongoing speculation (and hopefulness) that the Fed might reduce interest rates by 0.25% this month. However, this week’s data has strengthened the case for the Fed to cut rates. It has also shifted the narrative to whether a rate cut this month could be 0.25% -- or if the possibility of 0.50% cut is back on the table. Will the Fed enact a preemptive 50 basis point cut like they did in September 2024? Worries about a slowing labor market, offset by hopes of a rate cut will permeate investor psychology until the Federal Open Market Committee (FOMC) meeting on September 16 & 17. The next data point to watch will be the Consumer Price Index (CPI), which comes out next week.