Hope all is well. The S&P 500 rose in early August but reversed course at mid-month, resulting in an overall decline of 4.2% for the month. The major U.S. stock indexes fell this week between 3% and 4%, marking the third weekly setback in a row for the S&P 500. The decline was steepest for the NASDAQ, which has fallen nearly 11% over the past three weeks. The volatility in the market should start to subside soon as we continue to get signs that inflation is moderating without wreaking havoc on the labor market or corporate earnings. The NFL season kicks off on Thursday, so I have broken down this week’s news using quotes from some NFL’s most famous head coaches.
Workers remain in control of the labor market. The unemployment that is present is more reflective of people reentering the labor force or trying to improve their jobs rather than people trying to find jobs they desperately need. The U.S. labor market continued to generate new jobs in August though not at July’s stellar pace. The latest month’s gain of 315,000 was slightly above most economists’ expectations. More importantly, labor force participation is increasing as more Americans are entering the labor force and looking to achieve a higher level of success.
Several Federal Reserve presidents have told us over the past week that they are going to keep raising rates until the job of regaining price stability is done. It would be easy for them to point their finger at things they can’t control, but they are not doing that and I view that as a positive. U.S. crude oil was trading around $87 per barrel on Friday, dropping more than 6% for the week but as the Fed reiterated this week now is not the time to take a victory lap. It’s encouraging that oil is continuing to drop but remember that the Fed and the White House have very little control over the oil market. We were reminded of that this morning as the 13 oil producing nations that belong to OPEC+ surprised energy markets with a small production cut. The move will likely cause volatility tomorrow as it is viewed as a slap in the face to President Biden as it comes 52 days after his visit to Saudi Arabia where he hoped to secure increased production. While voters and politicians care a lot about the price of oil, the Fed not so much they focus more on core inflation (inflation less food and energy). The good news here is that several signs point to peak inflation still being behind us. Last week’s ISM manufacturing prices paid index fell to the lowest levels of the year and the housing market is starting to cool, as mortgage rates climb higher.
Corporations continue to post great results. Earnings seasons concluded and showed that companies are not only still profitable, they continue to grow. Companies in the S&P 500 posted an average second-quarter earnings gain of 6% over the same quarter a year earlier. The growth rate is slowing but still better than expectations. Corporate earnings are the key driver of the stock market over the long term.
The right thing to do is to stay invested and not make rash decisions based on short term downturns in stocks. Corporate earnings growth, labor market strength, steady wage growth and lower inflation give reason to believe the markets move higher in the long run. In the shorter term the period after midterm elections tends to be positive for markets, regardless of which party wins. Midterm elections will be held on November 8th. In the twelve months prior to election day, market performance can be volatile like this year. However, in the year after midterms, market returns are positive, on average by about 15%, regardless of which party is in power which results in a phenomenon where the 3rd year of a presidential term is usually the best for the stock market.
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