Stock futures indicate a sharply negative open to today’s trading. Before the bell was struck, the U.S. Bureau of Labor Statistics (BLS) announced employment data for the month of July. Job additions totaled a light 114,000, versus economists’ estimate of 185,000 and the revised month-earlier tally of 179,000. The unemployment rate increased to 4.3%, compared to 4.1% in June. Hourly wages advanced 0.2% in the month, one-tenth of a point below the rate reported in the prior month. On a yearly basis, pay was up 3.6%, also one-tenth shy of the outlook and slower than the recalculated 3.8% pace achieved in June. Labor force participation strengthened incrementally to 62.7%. Participation in the jobs market has improved from the low of 60.1% hit in April of 2020, during the global pandemic. The rate, though, has yet to fully recover to that of the pre-COVID days.
This BLS report follows data from Automatic Data Processing, released on Wednesday, showing that payroll additions declined to 122,000 in July from 155,000 in June. The Federal Reserve is closely monitoring the jobs market for any signs of serious deterioration, which Chairman Jerome Powell hopes to avoid. Federal Open Market Committee (FOMC) members held a meeting earlier this week, and decided to keep short-term interest rates at 5.25%-5.50%. The FOMC appears to be leaning toward a 25-basis-point reduction in the federal funds rate next month, with the aim of sustaining a healthy economy and jobs sector. Speculation has arisen on Wall Street that such a move might be followed in quick succession by two more 25-basis-point cuts in November and December, especially in light of higher recent initial jobless claims and softer manufacturing data.
Stock market volatility perked up in July, as it did this past April. Last month, the blue-chip Dow Jones Industrial Average posted a solid 3.1% advance, while the broader Standard & Poor’s 500 index gained a more modest 1.1% and the tech-heavy NASDAQ composite, after a strong performance in the first half of this year, gave back three percentage points. August is off to a shaky start, with the major indexes falling in the 1%-2% range during the first trading day. The markets are reacting to corporate earnings reports and new economic information. In recent days, tech sector leaders released June-quarter earnings results and provided near-term guidance. Investors have become concerned that momentum is slowing in the regenerative artificial intelligence segment and that more spending is needed to capitalize on this innovation. There is worry that the largest tech stocks might be overvalued.
A substantial number of investors have been rotating out of the Magnificent 7 issues into value/cyclical stocks, inclusive of small and mid-cap equities. We do, however, note that the Russell 2000 small cap index did take a breather on Thursday, after two weeks of strong gains. The markets are reacting to the growing likelihood of a Fed rate cut next month. Smaller companies are typically more dependent on debt and their stocks are, thus, interest-rate sensitive.
To yearend, we would not be surprised to see continued elevated share-price volatility. Investors have become increasingly reactive to corporate earnings reports and economic data releases. Additionally, domestic and international political happenings have been influential. More specifically, momentum in the current Presidential race is shifting, there is the danger of an expanded conflict involving Israel in the Middle East, Ukraine has gotten more-advanced weapons to step up its fight against Russia, China is asserting territorial claims along its coastal region, and violent protests have erupted in Venezuela. In such an environment, we advise maintaining portfolio diversification with core weightings of large cap issues and high-quality bonds, supplemented with holdings in the better-establish companies found in the small- and mid-cap arena. – David M. Reimer
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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