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Market sentiment contends with a potential union strike and government shutdown

Weekly market perspectives

The S&P 500 Index and NASDAQ Composite each posted their second consecutive week of gains, helping to mitigate their August slide lower. However, both major U.S. stock averages posted their first down month since February. The Russell 2000 Index snapped a four-week losing streak and posted its best week of performance since March. And helping to round out a quick look at the major averages, the Dow Jones Industrials Average glided higher last week, which also contributed to smoothing its August losses.

Within fixed income, Treasury prices were mostly stronger last week as yields moved lower. The curve steepening helped the 2-year/10-year Treasury spread narrow its inversion by roughly 70 basis points on the week. The Treasury spread is now the least inverted since May. 

On the week, the U.S. Dollar Index rose narrowly, Gold ended higher by over +1.0%, and West Texas Intermediate (WTI) crude jumped over +6.0%. Last week’s pop higher in crude prices was oil’s best weekly performance since March. Notably, the AAA national average price for a gallon of gasoline stands at $3.82 — the second highest level for this time of the year since at least 2004, according to Bespoke Investment Group. Gas prices are higher by +6.7% since Memorial Day versus the average decline of 3.7%, which is generally seen as the driving season winds down. As a number of retailers noted recently in their earnings calls, consumers, notably with less discretionary income to spend, are feeling pinched. Elevated prices at the pump are likely one very visible reason some consumers don’t think inflation is moderating fast enough to relieve the pressure on their wallets.

“Outside of the mostly neutral technical conditions in the market at the start of the month, two large unresolved issues could dampen sentiment as September wears on. A looming United Auto Workers (UAW) strike and a potential U.S. government shutdown are two critical macro drivers that could weigh on asset prices should each metastasize into more significant problems for growth and stability.”

Anthony Saglimbene - Chief Market Strategist, Ameriprise Financial

Stocks regain some losses from early August driven by weaker-than-expected economic reports

However, stock investors should feel somewhat relieved that August didn’t finish the way it was trending near the middle of the month. In a reprieve from the selling pressure in early August, the S&P 500 materially narrowed the nearly 5.0% August loss the Index was on pace for on a total return basis a little over two weeks ago — ending the month down just 1.8%. In addition, the NASDAQ Composite was off over 7.0% month-to-date as recently as August 18th but retraced much of those losses to finish down just 2.2% last month. In our view, if the brief drawdown in mid-August was the pullback investors were waiting for to take advantage of better pricing, there was little chance to react. Yet, a diversified portfolio likely helped investors participate in the late-month August rally, as the DJ Moderate Index (negative by roughly 2.5% in August) rose nearly +2.0% in less than two weeks. With weak seasonality factors in play for September, we suspect investors and traders will likely test recent market strength at some point this month while remaining tuned to changes in incoming economic data and interest rates.

Helping to drive stock prices higher last week was a series of weaker-than-expected economic releases, particularly on employment, which helped fuel the market’s hope of a soft-landing scenario. August nonfarm payrolls rose +187,000, beating the consensus estimate of 170,000. However, the prior two months of job gains were revised lower by 110,000. Notably, the three-month average in job gains now stands at roughly 150,000 per month versus the 190,000 average seen before the pandemic. And while the unemployment rate jumped to 3.8% in August from 3.5% in July, wages rose less than expected last month, rising +0.2% month-over-month and +4.3% year-over-year — both metrics came in lower than estimates.

Prior to the nonfarm payrolls report on Friday, the July Job Openings and Labor Turnover Survey (JOLTS) showed 8.83 million jobs open, materially lower than the 9.48 million expected and down from 9.17 million open jobs in June, which was revised lower from 9.58 million in the first release. All four major metrics in the most recent JOLTS report showed the job market is cooling. According to Bespoke Investment Group, layoffs trended higher from very low levels, the hiring rate fell below levels seen prior to the pandemic, the quit rate is back to pre-COVID-19 levels, and the openings rate fell to its lowest level in two years. Combined with August ADP private payrolls growing by a slower-than-expected 177,000 (consensus was 200K), stocks responded well to weaker-than-expected jobs data. 

Bottom line: The Federal Reserve wants to see the job market slow and labor slack increase. Last week’s batch of jobs data showed precisely that. Given the weaker (but still firm) labor trends in the U.S. economy, the CME FedWatch Tool currently indicates a 94% chance the Fed holds rates steady at its September 19th – 20th meeting. Slowing job trends + a probable Fed rate pause this month = higher stock prices. At least, that was the formula that worked for stocks last week.    

In other items that helped shape the week, August consumer confidence marked its largest miss versus expectations since December 2020. In addition, the core July Personal Consumption Expenditures Price Index came in mostly in line with consensus estimates. Manufacturing activity remained in a contraction last month. Notably, the personal savings rate saw its sharpest decline since January 2022, while pending home sales in July ticked modestly higher versus June levels but remained well below levels seen a year ago. Finally, a second look at Q2 GDP showed that the U.S. economy grew slightly slower by +2.1% versus the first estimate of +2.4%. Like last week’s reads on employment, the market appears comfortable with economic data showing cooling trends, which doesn’t directly or indirectly add to inflation pressures.

A potential UAW strike and government shutdown loom over the market and the week ahead

Stocks enter September in better technical condition than they entered August. Though the S&P 500 currently sits above its 50-day, 100-day, and 200-day moving averages, the slight price decline in August and deeper declines in mid-August have moderated how far the Index sits above these key thresholds at the start of the month. Recall that the S&P 500 was in an overbought condition at the end of July based on its 14-day relative strength index (RSI). By mid-August, the RSI was approaching an oversold condition and enters September in a neutral zone. Further, most S&P 500 sectors are currently in a neutral or oversold condition based on their 50-day moving averages. And finally, the number of S&P 500 stocks currently trading above their 50-day and 200-day moving averages sits below the five-year average. In August, both measures showed a high percentage of stocks trading well above each threshold. Bottom line: Although these points don’t necessarily suggest stocks won’t see further volatility in the weeks ahead, trading conditions appear more balanced today than they did entering August.

Outside of the mostly neutral technical conditions in the market at the start of the month, two large unresolved issues could dampen sentiment as September wears on. A looming Union Auto Workers (UAW) strike and a potential U.S. government shutdown are two critical macro drivers that could weigh on asset prices should each metastasize into more significant problems for growth and stability. If the Big Three domestic automakers do not reach a labor agreement with the UAW by September 14, the union’s 149,000 members across all three automakers have threatened to strike in unison. While labor’s demands for a new contract appear out of step with what original equipment makers are willing to concede, a prolonged strike at the scale at which the UAW has threatened could have a chilling effect across the auto industry as well as potentially dent U.S. GDP. The Anderson Economic Group estimates a ten-day UAW strike against all three automakers could cost the U.S. economy $5.6 billion. Four years ago, a UAW strike against GM alone lasted six weeks, costing the company $3.6 billion. 

A potential government shutdown at the end of the month could also take up more oxygen in the press the closer we get to the September 30 deadline without a budget agreement from Congress. While markets tend to look past such government dysfunction, a prolonged shutdown could delay key economic releases when the Fed and investors need the information to make sound decisions on rates and investments. In the background, a number of key global central banker meetings this month, including updated economic projections, should provide further insight into how policymakers see growth and inflation trends evolving into next year.

Finally, the abbreviated week ahead includes several Federal Reserve speeches from voting members, an updated Beige Book (Wednesday), and the August ISM Services report (Wednesday). The Fed’s Beige Book will provide a critical update on economic and financial conditions across the twelve Federal Reserve Districts and ahead of the Fed’s September policy meeting later this month. An updated ISM Services report will be closely watched this week as well, as services activity has been the main driver behind this year’s economic momentum. While services activity is forecast to decline slightly in August, it is expected to extend its expansionary run, which began in January. 

These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here. An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.     

Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. 

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 

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A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities. 

The fund’s investments may not keep pace with inflation, which may result in losses.

The fund may invest significantly in issuers within a particular sector, which may be negatively affected by market, economic or other conditions, making the fund more vulnerable to unfavorable developments in the sector.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices and sectors mentioned in this article are available on our website at in the Additional Ameriprise research disclosures section. 

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.  It is not possible to invest directly in an index. 

The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.

The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.

The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000. 

The US Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. This is computed by using rates supplied by approximately 500 banks.

The Dow Jones Moderate Portfolio Index is a member of the Dow Jones Relative Risk Index Series and is designed to measure a total portfolio of stocks, bonds, and cash, allocated to represent an investor's desired risk profile. 

West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.

The Personal Consumption Expenditure Index tracks the overall price changes for goods and services purchased by consumers. 

The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. 

JOLTS report is a monthly survey of U.S. job vacancies, hiring, and job separations released by the Bureau of Labor Statistics of the U.S. Department of Labor.

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