Week of August 5th, 2024

Key Points for the Week

• The S&P 500 fell last week, declining for the third consecutive week.
• Economic data last week showed the economy slowing more than expected, adding to worries about a potential recession.
• The Federal Reserve (Fed) decided against cutting interest rates last week.
• Monthly nonfarm payrolls came in weaker than expected, adding to the worries about the overall strength of the economy.

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

It is often said that markets hate uncertainty. There was a lot of uncertainty last week, and it showed.

“The technology-heavy Nasdaq 100 Index soared 3 [percent] on Wednesday and then retreated almost that much on Thursday, before paring the decline at the close, for its biggest up-to-down rotation since May 2022. The S&P 500 Index sank 1.4 [percent], just one day after rallying 1.6 [percent].”

Alexandra Semenova, Esha Dey, Carmen Reinicke, and Natalia Kniazhevich, Bloomberg.

High levels of market volatility reflect high levels of uncertainty. Here are three issues that have been top-of-mind for investors:

1. Will the United States experience a soft landing or dip into a recession?

Last week, investors became concerned that the U.S. economy may be slowing faster than anticipated. First, a key gauge showed that U.S. manufacturing activity slowed in July, reported Lucia Mutikani of Reuters. Then, on Friday, the U.S. unemployment rate rose to 4.3 percent as employers added fewer new jobs than economists had anticipated.

Investors were in a tizzy after seeing weaker-than-expected data. Expectations about the magnitude of a possible Federal Reserve rate cut in September changed—and then changed again. On Friday, the CME FedWatch Tool registered a 74 percent probability of a half-percentage-point rate cut at the Fed’s September meeting, suggesting that the market thought the Fed was likely to begin easing rates too late and would have to lower aggressively. Markets took some calming breaths and, on Saturday, expectations had reversed. There was a 22 percent probability of a half-point cut in September and a 78 percent chance of a quarter-point drop.

2. Will geopolitical issues escalate?

There is a lot happening around the world that could affect financial markets. One concern is ongoing tensions in relations between the United States and China. In addition to tariffs and trade issues, there are allegations that China is providing support for Russian war efforts in Ukraine, and concerns about a possible conflict over Taiwan. 6 Energy security also is a risk as wars in Ukraine and the Middle East have disrupted energy supplies in some regions of the world, according to S&P Global and David McHugh and Matthew Daly of AP News.

3. Who will win the United States election?

There has been—and will continue to be—a lot of speculation about the outcome of the U.S. election and its potential effect on the economy and markets. The emotion that accompanies elections can make it difficult to remember that financial markets are generally efficient and adjust to changing risks. While election sentiment may sway stock markets over the shorter term, other factors—valuations, earnings, and the business cycle also are important, reported Karishma Vanjani of Barron’s.

Last week, major U.S. stock indices moved lower with the Nasdaq Composite Index dropping into correction territory as it fell by about 10 percent. The U.S. Treasury market rallied as the yield on the benchmark 10-year Treasury fell to its lowest level since last December, reported Pia Singh and Hakyung Kim of CNBC.

This Week in the Markets

This is only the second 5% mild pullback of the year and investors need to remember that most years see more than three of these pullbacks on average. Even last year, as great as it was for stocks, we saw a 10% correction from late July until late October, followed by a huge end of year rally. We like to say volatility is the toll we pay to invest and last week was quite the reminder of this.

From Washington drama, to geopolitical risks, to renewed concern about a slowing economy, the worries are no doubt building and investors have a lot to think about right now. In times like this it is important to remember that all years have scary headlines and things to worry about. Here is a chart going all the way back to 1900 that shows how stocks tend to go higher over time, even amid horrible headlines.

August Is not Always Bad

This has been one of the worst first two days to a month ever, but all hope is not lost. August is known for volatility and rough sledding. The S&P 500 has averaged a negative month in August since 1950 as well as over the past 10 years, something only February and September can match. But here is the catch, and there is always a catch. Stocks have historically done quite well in election years in August.

Here are two charts that show other angles on how stocks historically do well in August of election years.

The Federal Reserve

The Fed has two mandates, to keep prices under control and maintain full employment. Well, for the longest time they have been worried about inflation and not the economy/employment, but those times are changing and potentially quickly. One of our worries lately has been a Fed mistake here and it could be happening. The good news is all hope is not lost, as they can cut in September and hopefully right the ship, and before then even signaling their intentions more clearly could help stabilize the market.

The bond market though is calling the Fed’s bluff, as yields across the curve have crashed lower. What do lower yields mean to investors? Lower yields mean higher bond prices (they are inversely related), so if you owned some stocks AND bonds last week you did not do as badly as you might think. Bonds had a big week, easing the pain you felt from your stock holdings. It was not that long ago that both bonds and stocks would go down together, so it is nice to get back to a time where bonds act as a buffer when trouble hits.

July Jobs Data Disappointed

Right after the Fed did not cut on Wednesday, we saw an influx of disappointing data. Thursday’s set of economic data saw initial jobless claims rise to their highest level in a year, alongside a weak manufacturing ISM number. Stocks fell and bonds rallied as yields fell. Unit labor costs came in below expectations as well, indicating continued fading inflationary pressures. Missed in this news flow was a stronger-than-expected productivity number reported Thursday, something we have been expecting all year.

Friday’s non-farm payroll number missed expectations at only 114,000 jobs versus expectations of 175,000, with the prior month revised lower as well. Healthcare and government, which had dominated prior reports, showed less of an impact in July. While 114,000 jobs created was below expectations, the number was still positive and not the lowest we have seen in the past year (April came in at 108,000 jobs). There are also indications that hurricane Beryl impacted the number based on how the data is collected. Lastly, the increase in construction jobs was interesting, coming in at a solid 25,000 jobs added.

All eyes were on the unemployment rate in this report, which has been creeping higher over the past several months. The unemployment rate came in above expectations at 4.3%, the highest level since early 2022.

Bond markets are doing the Fed’s job on its behalf, with interest rates across the curve falling substantially, easing overall financial conditions. Data this week on employment costs and hourly earnings have come in cooler than expected, and real time rent prices has been negative for nearly a year now. Inflation is no longer an issue and with signs of a cooling labor market, the Fed has good reason to cut interest rates. September is all but certain, and now many are pointing to the potential for a 0.50% cut to play catch up. Friday morning showed market-implied odds of more than a 70% chance of a 0.50% cut in September, up from the teens the day before.

While the very hot labor market has now cooled some, the economy is still on good footing as we saw in the preliminary GDP numbers earlier last week. There are very few, if any, signs of economic excesses in the economy and corporate America is in a strong financial position. The biggest issue currently is overly tight monetary policy, and the Fed has plenty of ammunition to make that adjustment and do so quickly. The Fed’s Economy Policy Symposium in Jackson Hole, Wyoming later this month will be the next major event to watch. Historically, monetary policy shifts have been strongly signaled at this meeting, and any statements potentially signaling the size of the September interest rate cut will be highly scrutinized.

The Olympic Bonus

Before 1972, only amateur athletes could compete in the Olympics. For example, in 1913, Jim Thorpe’s Olympic titles were stripped from him because Thorpe had been paid to play semi-pro baseball for two seasons. (Eventually, his gold medals were reinstated.)

Olympic amateurism rules became less stringent during the latter decades of the 20 th century and, by the 1990s, the rules were mostly eliminated. Today, athletes from many countries receive a bonus if they earn a spot on the Olympic podium. For example, the United States awards bonuses of $38,000 for a gold medal, $23,000 for silver, and $15,000 for bronze. Many countries offer far larger bonuses, reported Lee Ying Shan of CNBC. Here are a few:

• Hong Kong, which has won 13 Olympic medals in total (when this was written), pays a bonus of 6 million Hong Kong dollars (~US $768,000) for a gold medal, HK$3 million for silver (~US $384,000), and HK$1.5 million for bronze (~US $192,000).
• Singapore, which has won five Olympic medals in total (when this was written), pays a bonus of 1 million Singaporean dollars for a gold medal (~US $745,000), SG$500,000 for silver (~US $373,000), and SG $250,000 for bronze (~US $186,000).
• Indonesia, which has won 37 Olympic medals in total (when this was written), pays a bonus of 5 billion Indonesian rupiah for a gold medal (~US $300,000), Rp2.5 billion for silver (~US $150,000), and Rp1.2 billion for bronze (~US $75,000).

Other countries that offer a triple-digit U.S. dollar bonus for gold include Israel, Kazakhstan, Malaysia, and Spain.

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 7, 1782: George Washington Creates the Purple Heart

On August 7, 1782, in Newburgh, New York, General George Washington, the commander in chief of the Continental Army, created the “Badge for Military Merit,” a decoration consisting of a purple, heart-shaped piece of silk, edged with a narrow binding of silver, with the word Merit stitched across the face in silver. 

The badge was to be presented to soldiers for “any singularly meritorious action” and permitted its wearer to pass guards and sentinels without challenge. The honoree’s name and regiment were also to be inscribed in a “Book of Merit.”

Washington’s “Purple Heart" was awarded to only three known soldiers during the Revolutionary War: Elijah Churchill, William Brown and Daniel Bissell, Jr. The “Book of Merit” was lost, and the decoration was largely forgotten until 1927, when General Charles P. Summerall, the U.S. Army chief of staff, sent an unsuccessful draft bill to Congress to “revive the Badge of Military Merit." 

In addition to aspects of Washington’s original design, the new Purple Heart also displays a bust of Washington and his coat of arms. The Order of the Purple Heart, the oldest American military decoration for military merit, is awarded to members of the U.S. armed forces who have been killed or wounded in action against an enemy. It is also awarded to soldiers who have suffered maltreatment as prisoners of war.

Weekly Focus

Man was made at the end of the week’s work, when God was tired.

Mark Twain, American Writer and Humorist

If at first you don’t succeed, then skydiving is definitely not for you.

Steven Wright, American Comedian and Actor