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The first week of August ended up being another winning week for the stock market. It wasn’t an easy ordeal, yet market participants largely retained the positive mindset that prevailed throughout July.
Things started on a somewhat weak note. There were some assumptions that the market would face selling pressure after the huge move it made in July. That rang true in the first part of the week but not so much in the latter part of the week. Fittingly, market participants got over the selling hump on Wednesday (hump day), which proved to be the big difference in making this another winning week.
The cautious start to the week coincided with a relatively weak ISM Manufacturing Index for July, a sizable drop in oil prices on demand concerns, and saber-rattling by China in front of an expected visit to Taiwan by House Speaker Pelosi.
The latter visit happened on Tuesday, but China’s initial response wasn’t deemed proportional to the bluster it was expressing in front of the visit. China ultimately announced that it would hold live-fire military exercises near Taiwan. On Friday, China announced that it will be sanctioning Ms. Pelosi and her family, and cutting back on cooperation with the U.S. on certain matters like climate change initiatives.
The lack of a more consequential response was a catalyst for a broad-based rally on Wednesday, which also featured strong leadership from the mega-cap stocks and another sizable drop in oil prices even though OPEC+ said it was going to raise output in September by 100,000 barrels per day versus July and August when it increased its production quota by 600,000 barrels per day.
WTI crude prices slumped below $90.00 per barrel this week, settling Friday at $88.73 per barrel. That move undercut the energy sector, which was the worst-performing sector this week with a 6.8% decline (including a 2.0% gain on Friday). The best-performing sectors were the information technology (+2.0%), consumer discretionary (+1.2%), and communication services (+1.2%) sectors.
The mega-cap stocks were influential sources of support at the index level most of the week. That was evident in the standing of the vanguard Mega-Cap Growth ETF (MGK). It gained 1.8% for the week versus a more modest 0.4% gain for the S&P 500 and an even smaller 0.1% gain for the Invesco S&P 500 Equal Weight ETF (RSP).
That performance made an important difference in the continued outperformance of the growth indexes, as did the relative strength in many smaller-sized companies. The Russell 3000 Growth Index jumped 1.6% this week versus a 0.2% decline for the Russell 3000 Value Index.
This week was not without its speculative flair either. There were some major short squeezes in a number of stocks and AMTD Digital (HKD), which opened for trading at $13.00 per share on July 15, went as high as $2555.30 on Tuesday, August 2, on no news. Its price action became the news.
Switching gears, there was a ton of earnings news this week. The companies reporting didn’t have the cachet of last week’s reporters. Nonetheless, they generally carried the mantle of providing better-than-feared results, which was still good enough to keep buyers interested.
The earnings news took a backseat to the July employment report as the week progressed. There was some skittishness ahead of that report given the manner in which it could shape the market’s perspective on the path of Fed policy.
The report ended up being much stronger than expected. Nonfarm payrolls increased by 528,000, the unemployment rate fell to 3.5%, and average hourly earnings were up 5.2% year-over-year. The key takeaway was that it squashed the notion that the Fed can turn friendly with its monetary policy decisions sooner rather than later.
The Treasury market took that view to heart. The 2-yr note yield, which hit 2.80% earlier in the week and stood at 3.05% right in front of the report, settled Friday’s session at 3.23% (up 33 basis points for the week). The 10-yr note yield, which hit 2.53% earlier in the week and stood at 2.70% right in front of the report, settled Friday’s session at 2.84% (up 20 basis points for the week).
Initially, the stock market was rattled by the report and the move in market rates, but it eventually found its nerve and put together a nice rebound effort. Friday’s session did not culminate in gains for each of the major indices, but the overall performance was better than what many feared it would be based on the shifting rate-hike expectations.
Prior to the report, the fed funds futures market was assigning a 34% probability to a 75-basis point rate hike at the September FOMC meeting. That probability shot up to 68.5%, according to the CME’s FedWatch Tool, in the wake of the report.
The relative resilience of the stock market after the employment report squashed its seemingly preferred outcome (i.e. weak data that suggested the Fed will be lowering rates in the first half of 2023) likely revolved around two, alternative takes on the data:
- The continued strength of the labor market shows that the economy can handle the Fed’s rate hikes without devolving into a hard-landing scenario, or
- Employment is a lagging indicator, and given the lag effect of the Fed’s rate increases, there will be much weaker numbers in coming months that will invite a friendlier shift in monetary policy sooner rather than later
It is hard to say what the ultimate driver of sentiment was, but because the market stood its ground for the most part after the report, the S&P 500 scored its third straight winning week.
- Dow Jones Industrial Average: -9.7% YTD
- S&P Midcap 400: -11.9% YTD
- S&P 500: -13.0% YTD
- Russell 2000: -14.4% YTD
- Nasdaq Composite: -19.1% YTD
Source: Briefing Investor
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