Best Week of the Year
- The S&P 500 bounced back with its best week of the year, as recession fear once again was seemingly overblown
- We remain in a bull market, but expect more potential volatility over the coming months heading into the election
- Retail sales surprised strongly to the upside showing the consumer still has a lot of staying power as the engine of the expansion.
- But high rates continue to weigh on housing and industrial activity.
- With inflation increasingly benign, we believe markets will want to see a Fed that is willing to normalize tight policy.
Exactly two weeks ago today, the S&P 500 fell 3% for its worst day of the year, as fears over a recession, a Federal Reserve (Fed) behind the curve on interest rate cuts, and the yen carry trade dominated markets. Here we are exactly two weeks later and stocks are a few good days away from new highs.
As we will discuss below in more detail, we still believe the US economy is just fine. Yes, it might be slowing some, but slowing doesn’t mean a recession. In the end, the S&P 500 gained 4% for the best week of the year and strongest week since last November. In fact, the best and worst day of the year so far were within just a few days of each other. As we’ve noted before, this is perfectly normal, as volatility tends to cluster and big moves (in both directions) tend to happen in close proximity to each other.
How rare was last week? All five days were higher, and the gain for the week was solid at over 3.5%. The last two times that happened were February ’21 and November ’23. Note that six months later stocks were up another 14.1% and 19.0%, respectively, so on the surface this doesn’t appear to be a bearish signal.
Stocks not only finished green every day last week, but they are currently up seven days in a row for the second time this year. We looked and found the last 12 times the S&P 500 had at least two separate 7-day win streaks during the calendar year, and stocks were higher for the year all 12 times and up more than 18% on average. Given stocks are up more than 14% this year currently, we do expect to see potentially more gains before 2024 is over. Since 1990, this is the 33rd 7-day win streak and wouldn’t you know it that future longer-term returns after these blasts of strength tend to support the bulls, with the S&P 500 higher 80% of the time six months later and up a median of 7.0%, and higher a year later more than 83% of the time and up a median of nearly 12%.
But We Aren’t Out of the Woods Yet
As we explained last week, even the best years have a few bad days and scary headlines. We didn’t expect 2024 to be any different and sure enough, it hasn’t been. But are we out of the woods yet? We don’t think so. Take note that historically the months leading up to US elections can be quite choppy and volatile. 2016 and 2020, for instance, both saw significant weakness leading up to the election, then strong rallies after. We expect to see this play out once again.
But what investors need to know is if they get scared and get out, they will likely also miss some of the best days of the year. We looked and found a $10,000 investment in the S&P 500 over the past 20 years would be worth close to $64,000 if you held onto it, but if you missed the best 10 days that was more than cut in half to less than $30,000 and it only gets worse from there. We like to say it is about time in the market, not timing the market and this is one of the best ways to show this. If you get out to wait for more clarity or for less uncertainty, just know you’ll probably miss the best days and this will likely cost you in the end.
Recession Narrative Fades on Strong Retail Sales
As long as employment is strong, consumer spending will be strong. Yes, job gains slowed in July but prime age (25-54) participation in the labor market remains near record levels, layoffs remain low, and aggregate income growth has been solid. Those numbers were the underpinning of a large upside surprise in July retail sales. Headline retail sales came in at 1.0% growth for the month versus expectations of 0.3%. Core readings also surprised to the upside, with retail sales ex-autos climbing 0.4% versus a 0.2% consensus expectation and the “control group,” which best captures the consumer spending category in GDP calculations, climbed 0.35% versus a 0.1% consensus expectation.
Given the somewhat gloomy economic expectations still baked into the market following the weaker-than-expected August 2 jobs report, the market response was decisively positive. Prior to yesterday, market gains on retail sales day had generally been in line with average returns—this hasn’t been a market-moving report, unlike the CPI inflation report and monthly jobs report. But yesterday’s reaction was the strongest in the last 10 months independent of direction.
S&P 500 Index gains weren’t the only sign that the retail sales report shifted the market picture of the economic outlook. The market-implied odds of a 0.50%-point hike at the Fed’s next policy meeting dropped another 10 percentage points after the release, from 37.5% to 27.5% according to CME calculations. Also, after three days of declines, the 10-year Treasury yield popped from 3.82% to 3.92%. And finally small cap stocks caught a bid, the Russell 2000 Index of small cap stocks climbing 2.5% versus the S&P 500’s 1.6% gain. When yields rise but small caps outperform in the current environment, it’s likely that a change in growth expectations is the main driver.
While retail sales drew the most interest, there was a flood of economic data yesterday and there were some signs that the Fed’s tight policy continues to weigh on the economy. While the weekly jobs data on unemployment insurance claims continued to allay some concerns of a weakening job market, industrial production pulled back and has been easing since 2022 despite supportive fiscal policy.
Household spending is the engine of economic growth in the US, but industrial production, which includes manufacturing, mining and drilling activity, and utilities, remains an important secondary gauge of the economy’s health. In fact, despite the upside surprise in retail sales the Atlanta Fed’s “Nowcast” of third quarter economic growth fell from 2.9% to 2.4% following Thursday’s data dump, primarily on a shift in expected inventory activity, which is part of the gross private domestic investment category. Expectations for final sales, which excludes inventory, held steady at 2.7%.
Source: FactSet 8/16/2024
Looking at the retail sales report itself, the big driver of the upside surprise in the headline number was auto sales, not surprising given falling auto prices. Control group gains have been supported by electronics, online shopping (“nonstore retailers”), and health and personal care stores. That may be an indicator that while households have curtailed spending on some items, back to school spending remains a priority.
Overall, the day’s data dump and market reaction were a sign that the market’s read on the economy is coming back to where we thought it would following the pop in market volatility in late July and early August. The economy’s underlying fundamentals are sound but there are segments where tight Fed policy is having a bite. You can see that in the industrial production data, but also the jump in mortgage activity after rates moderated even a little. Better data is moving market expectations towards just one hike in September, which we think is more aligned with the Fed’s comfort level. That would likely be enough, although it would be important that forward guidance signal the Fed is aware of the risk of falling further behind the curve.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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