Week of August 12th, 2024

Key Points for the Week

• Last week was one of the most volatile weeks this year as the S&P 500 sold off early in the week and then rallied late in the week to finish flat for the week.
• This recent patch of volatility is normal, even for good years for stocks.
• August is known for volatility and once again, it is living up to its reputation.
• The late week rebound was supported by better economic data, including some good jobs-related numbers.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

Last week, financial markets were volatile. The CBOE Volatility Index (VIX), which is known as Wall Street’s fear gauge, rose to the highest level in four years before cooling down.

“While spikes in the VIX often coincide with deep market sell-offs, they can also be short-lived and precede a rebound for stocks.”

↳Jesse Pound, CNBC

Investor uncertainty contributed to market fluctuations last week. There were many reasons for the uncertainty. For example, some investors:

Were unsettled by economic data. Markets stuttered after a weaker-than expected jobs report. Some investors panicked, believing the United States might be headed for a recession rather than a soft landing.

“A slowing economy could create challenges for equities to achieve the kind of earnings growth that analysts were penciling in for the quarters ahead.”

↳noted a source cited by Connor Smith, Barron’s

On Thursday, investors regained some confidence after data showed the number of people filing for unemployment claims was lower than expected. The information suggested the labor market remained solid. The subsequent rally was unexpected because jobless claims don’t normally move the market, reported Barron’s.

Concerned about geopolitical risks. Recently, the United States, the United Kingdom, Australia, France, Canada, South Korea, Saudi Arabia, Japan, Turkey and Jordan all warned their citizens to leave Lebanon as quickly as possible on fears that hostilities in the Middle East may escalate, reported Tom Bennett and Hugo Bachega of the BBC.

“Iran, Israel and Hezbollah all have the capabilities to continue to attack each other without triggering physical supply cuts in energy or blocking global shipping. Those are the kinds of effects that would trigger a major market reaction. Though a persistent danger is that, in the fog of war, one party or other goes too far or misreads its adversaries’ intent. Events can quickly spiral out of control.”

↳Matt Peterson,* Barron’s*

May have been less experienced. It is summertime and people—including money managers and traders—are vacationing.

“Spare a thought, then, for the 20-somethings left to run the northern hemisphere’s trading desks over the next few weeks, while their bosses doze on a beach. Possibly for this reason, markets are often more jittery than usual during the summer months. Last year, for example, it was in August that American share prices began their final protracted fall before a storming bull run that took them to new all-time highs. That may be down to liquidity, which…tends to be slightly thinner during the holiday season than in the rest of the year. It may also be that the lack of veterans on banks’ trading floors allows panic to set in more easily. Prices can swing a lot further before someone musters the courage to push back.”

↳The Economist

Despite sharp swings higher and lower, major U.S. stock indices finished the week close to where they started it. The yield on the benchmark 10-year U.S. Treasury finished the week higher.

This Week in the Markets

We came into Monday morning with global markets down, led by Japan’s Nikkei, down more than 12% for the worst single day since the crash of 1987. The Bank of Japan (BOJ) surprised markets with a rate hike which lead to a big move in the yen, which in turn unwound the yen “carry trade,” causing many risk assets to sell off heavily.

But as the week progressed things calmed down and better economic data showed fears of a recession were once again overblown. We saw both strong services data and a move lower in initial jobless claims, sparking the big late week rally. In the end, Monday was the worst day since September 2022, while Thursday was the best day since November 2022. But point to point, the S&P 500 ended the week almost exactly where it began.

Putting Things in Perspective

The S&P 500 had pulled back from its mid-July peak before the late week rally. This was the second 5%+ mild pullback we have seen so far this year and it is important to remember most years see more than three of these on average, along with one 10%+ correction.

As scary as last week was, even the best years tend to see volatility and some scary headlines, so to think 2024 would be any different was probably foolish. Here is a chart showing that since 1980, the S&P 500 gained more than 10% per year on average, but has pulled back an average of 14.3% peak to trough intra-year as well. That puts the 11.5% rally and 8.5% pullback we have seen in 2024 in better perspective.

There’s Something About August

Yes, what we saw last week due to the yen carry trade unwinding was not fun for investors, but it turns out August is the month we tend to see these types of out of the blue events more often than any other.

Starting clear back in 1990 when Iraq invaded Kuwait, August seems to be susceptible to large geopolitical or market events taking place. In 1997 was saw a major Asian banking crisis. 1998 saw the Russian debt default. 2010 had a European banking crisis. In 2011 there was the US debt downgrade, and in 2015 China’s surprise devaluation of its currency. All these events caused extreme fear and heightened volatility.

Employment

The August 2 jobs report already had markets primed for a potentially volatile week after job gains came in much weaker than expected and the unemployment rate ticked up to 4.3%. Markets seemed to find some reassurance on Thursday in the weekly data on new claims for unemployment. As you can see below, new claims had looked like it was potentially starting to spike a few weeks ago but has since settled down and Thursday’s number came in at 233,000, below expectations of 240,000 and 250,000 prior.

The current number remains consistent with the 2018-2019 average, despite a larger labor force now. The insured unemployment rate also has not deviated meaningfully from what we have seen the past couple of years or the 2018-2019 average. Taken together these numbers tell us that hiring has slowed but concerns about the economy have not led to a big pick-up in layoffs. The unemployment rate ticked up because new entrants to the job market are having more trouble getting hired, but current workers are still experiencing relative job security.

The new jobs-related data also had an impact on rate cut expectations. After the jobs report had come out on August 2, expectations of a 0.50% rate cut in September had jumped from near zero to about 75%. By the end of the week, it had settled down to a 50% chance of a 0.5% cut and a 50% chance of a “normal” 0.25% cut in September. (Although keep in mind there is still a near 100% expectation that there will be a rate cut of some type in September).

Larger Swings Tend to Persist as the Market Recalibrates

The market may push higher this year as the economy attempts to avoid a recession, the Fed starts to cut interest rates, election uncertainty fades, and corporate earnings remain resilient. Still, markets are likely to continue to see bigger swings in both directions than we saw in the first half of the year. It is normal to see larger swings even as markets go through the process of settling down. It is uncomfortable, but often these normal pullbacks and corrections can make for a healthier market going forward.

The World’s Most Livable Cities

The Economist Intelligence Unit (EIU)’s Global Liveability Index improved marginally in 2024. The EIU’s annual survey evaluates the stability, healthcare, culture and environment, education, and infrastructure of 173 cities around the world to determine which are the most—and least—livable.

“Declines in stability and infrastructure across a number of cities in advanced economies were offset by structural improvements in healthcare and education in several cities in developing markets…An acute housing crisis has pulled down infrastructure scores of some of the top-ranked cities.”

↳The EIU

The war with Hamas caused Tel Aviv, Israel, to slide down the list this year. The cities that were most livable included:

• Vienna, Austria
• Copenhagen, Denmark
• Zurich, Switzerland
• Melbourne, Australia
• Calgary, Canada

Vienna took top marks although it was held back from a perfect score by a lack of major sporting events. Copenhagen, Zurich and Geneva…are notable for their modest population size, which tends to lead to lower crime rates and less crowded roads and public-transport systems.

Many of the cities at the bottom of the livability list have seen little improvement year to year. The stability category, overall, saw the biggest decline in 2024. Some lower-ranked countries have seen their economies destroyed by civil war. The cities that were least livable included:

• Damascus, Syria
• Tripoli, Libya
• Algiers, Algeria
• Lagos, Nigeria
• Karachi, Pakistan

Cities in the U.S. were not in the top or bottom five. If we focus only on the U.S., the top cities (as ranked by the EIU) were: 1) Honolulu, Hawaii; 2) Atlanta, Georgia; 3) Pittsburgh, Pennsylvania; 4) Seattle, Washington; 5) Washington D.C.; 6) Chicago, Illinois; 7) Boston, Massachusetts; 8) Miami, Florida; 9) San Francisco, California; and 10) Minneapolis, Minnesota, reported Celia Fernandez of CNBC.

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

Corporate Transparency Act

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States will be required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

August 14, 1935: FDR Signs Social Security Act

President Franklin D. Roosevelt signed into law the Social Security Act on August 14, 1935. Press photographers snapped pictures as FDR, flanked by ranking members of Congress, signed into law the historic act, which guaranteed an income for the unemployed and retirees. FDR commended Congress for what he considered to be a “patriotic” act.

Roosevelt had taken the helm of the country in 1932 during the Great Depression, the nation’s worst economic crisis. The Social Security Act (SSA) was in keeping with his other “New Deal” programs, including the establishment of the Works Progress Administration and the Civilian Conservation Corps, which attempted to hoist America out of the Great Depression by putting Americans back to work.

Although it was initially created to combat unemployment, Social Security now functions primarily as a powerful safety net for retirees and the disabled, and provides death benefits to taxpayer dependents. The Social Security system has remained popular and relatively unchanged since 1935.

Weekly Focus

Stardom is not a profession. It is an accident.

Lauren Bacall, American Actress

How inappropriate to call this planet Earth, when it is quite clearly Ocean.

Arthur C. Clarke, British Fiction Writer