Monthly economic and market review: August 2024

Just as the July page was being torn from the calendar, the markets went into something of a tailspin. After the Federal Open Market Committee meeting of 31 July, the Fed chairperson Jerome Powell announced that the more recent inflation numbers had inspired confidence and that some members of the committee had even considered voting for a first interest rate cut at that meeting. While rates were left unchanged at the July meeting, Powell indicated that a rate cut could be on the table for the next meeting in September but that a 50 basis point cut was not under consideration as a first move. What spooked the markets, however, was his comment that the downside risks to the employment mandate where now considered to be real. As if on cue, the monthly employment data released on the 2^nd of August showed job growth of just 114,000 (well below expectations) with the unemployment rate jumping to 4.3% from 4.1%. The growth in hourly wages also slowed below expectation for a third strike from the report. The weak employment report followed data earlier in the week that represented the worst ISM manufacturing activity since November last year and the worst level of ISM manufacturing employment since 2020. The weekly initial jobless claims report also recorded its highest level in almost a year.

All of that weak labour market and economic data in combination left the markets reeling and the S&P 500 lost 6% in the first three trading days of August. The NASDAQ Composite index lost 8% and market-darling Nvidia gave up 14% over the same period. The local market was not immune to Wall Street’s wobble and the JSE lost 4% in the first four trading days of the month. The US markets had been experiencing a significant rotation into smaller capitalisation stocks during the course of July as the large capitalisation growth stocks (mostly IT) looked to be trading at fairly stretched valuations. Fears of a hard landing for the US economy and an ensuing recession gripped the markets and the trading volatility index spiked. It seemed to be all doom and gloom but the pessimism dissipated as quickly as it had started. History will show a truly short duration market panic attack, with the S&P 500 having fully recovering its August losses eight trading days later (15 August). The NASDAQ Composite was back to its end-July level on the very same day. After some consolidation, the S&P 500 closed the month 2.3% higher and the NASDAQ Composite closed 0.6% higher. Not to be outdone, the JSE closed 1.2% higher in August (see graph below) after recording an all-time closing high of 84,533 index points on the 27^th of August.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 31 Aug 24

Source: Factset

During the brief market malaise, much of the economic focus was on the perceived weakness in household consumption demand. Lower interest rates were seen as the cure but the market believed that the Federal Reserve had overplayed its hand and kept interest rates too high for too long. With the Fed behind the curve, the only remedy was seen as a quicker or more substantial easing of monetary policy (bigger rate cuts). At the Jackson Hole Economic Symposium late in the month, chairperson Powell laid all the verbal groundwork for a September rate cut with the market still guessing as to the magnitude of the easing but not anticipating a very lengthy or deep rate cutting cycle. A notable feature of the second quarter US reporting season was the ongoing reference in earnings reports to the weak demand out of China – from a consumer point of view and from a commodity point of view. With no apparent major economic stimulus from the Chinese authorities, those concerns remain. Other factors impacting the market during August included the ongoing global tensions and conflict (Russia-Ukraine, Israel-Gaza), national elections (Kamala Harris accepting the Democratic Party nomination) and some reversal of the yen carry trade. Japanese investors had been able to borrow cheaply at home and invest in higher yielding instruments abroad but rising interest rates in Japan, falling yields elsewhere, particularly in the US, and a stronger yen/weaker US dollar made the trade less attractive and saw some of those trades being reversed. The upshot of all of this was a weaker US dollar during August (see table below), a flattening of the inverse US yield curve as yields declined (two year and 10-year treasuries closed at the same yield), a weaker oil price, a stronger gold price and iron ore that traded below $100/t for the first time since late 2022.

The table above also points to a softening in consumer price inflation. US headline CPI dipped below 3% and edged closer to the 2% target while South Africa’s inflation rate moderated to 4.6%, just marginally above the midpoint of the 3-6% target range. With lower inflation, improved inflation expectations from both consumers and policymakers, the door is open for both the Federal Reserve Bank and the South African Reserve Bank to cut rates for the first time in the cycle on 18 and 19 September, respectively. The European Central Bank made their first cut in June, opting to monitor developments before cutting again but the stars may now be aligning for further easing at their next meeting on 12 September. September is shaping up to be a notable monetary policy easing month.

The local market showed a clear division during August with the top 20 list of winners entirely comprised of financial and industrial stocks and the list of the top 20 losing counters littered with resources and materials companies. The three listed telecommunications companies had a sharp recovery during the month off extremely low levels. MTN’s earnings were decimated by a collapse in the Nigerian naira but the underlying operations were seen as strong. Earnings outlooks and results from the banks were also viewed positively, with some reduction in impairment provisioning and potentially less stringent credit-granting requirements in a future declining interest rate environment. Lower bond yields and looming lower official interest rates also lifted some of the heavyweight listed-property stocks into the frame during August (see the table below). The year-to-date (“YTD”) list of winners and losers has a similar sectoral makeup to the monthly list except that gold-miners AngloGold Ashanti and Harmony have benefitted from the record gold price high and made it onto the winners list. Gold Fields, on the other hand, signalled and reported sharply lower production along with higher costs for their interim period and the share lost 22% during the month on the back of the consequent earnings decline.

The US second quarter earnings season wound down during August with the focus squarely on the Nvidia results right at the end of the month. The Nvidia numbers were a blowout as expected but the guidance was not as spectacular as a greedy market was anticipating (particularly around the new Blackwell chip) and the share sold off. Despite all of the noise, the anticipation and all of the broader market shenanigans during August, Nvidia still closed 2% up on the month to be left 141% up for the year-to-date (after a gain of 239% in 2023).

The big winner during August, however, was Starbucks (see table above). The company posted its quarterly results at the end of July and that did little to move the share either way. The big news for the company came on 13 August when it announced that Brian Niccol, chairperson and CEO of Chipotle, would become chairperson and CEO of Starbucks from 9 September with the current incumbent, Laxman Narasimhan, stepping down immediately. The share jumped from a close on 12 August of $77.03 to a close of $95.90 on 13 August (up 19.7% on the day) on hopes that Nicol would transform Starbucks after his turnaround of Chipotle. The share held on to most of its gains to close out August at $94.57, a gain of 21% on the month.

Sectors that underperformed the S&P 500 index’s positive 2.3% return in August included Consumer Staples (+5.8%), Real Estate (+5.6%), Healthcare (+5.0%), Financials (+4.4%), Utilities (+4.3%) Industrials (+2.7%) and Materials (+2.2%). The underperforming sectors included Energy (-2.3%), Consumer Discretionary (-1.1%), Technology (+1.2%) and Communication Services (+1.2%).

With the bulk of the companies on the S&P 500 having reported earnings by the end of the month, the aggregate year-on-year growth rate in earnings was around 11% - the fastest pace of growth since the first quarter of 2022. A mid-single digit pace of earnings growth is expected for the third quarter with an acceleration in the quarters that follow. From this vantage point, earnings growth of 15% is still expected in calendar 2025 on revenue growth of 6%. That earnings growth should provide a solid underpin to the markets going forward, despite the many record highs achieved by the S&P 500 during the course of this year. What is encouraging is that the broader base of stocks outside of the “Magnificent Seven” is showing earnings growth.

Historic and forecast earnings growth for the S&P 500

September is often a seasonally quieter/weaker month for the markets as the Northern Hemisphere says its final goodbyes to summer. Encouraging though is that we are witnessing broader corporate earnings growth, potentially lower US interest rates in the month and market-supporting share buybacks that are resuming post the earnings reporting season. Earth, Wind and Fire pointedly quizzed whether we “remember dancin’ in September?” We cannot be sure to get to that level of excitement in the month that lies ahead but we will certainly be happy if we can respond that mostly “there was never a cloudy day.”