Weekly Wrap

Most of the major indices closed this volatile week little changed from last Friday. The S&P 500 was fractionally lower on the week, the Nasdaq Composite declined 0.2%, the Dow Jones Industrial Average settled 0.6% lower, and the Russell 2000 underperformed, dropping 1.4%.

The week opened with a continuation of the global sell-off that began last week on fears about US economic growth following last Friday's jobs report. Japan's Nikkei slumped 12% on Monday, precipitating a big sell-off in US equities. This huge downturn was related to an unwinding of the yen carry trade as the yen strengthened rapidly against the dollar. 

Monday's sharp moves lower had the S&P 500 flirting with correction territory (i.e. 10% decline from its recent high).

The carry-trade unwinding settled down and the Nikkei jumped over 10% on Tuesday as the yen weakened against the dollar. The market was still worried about the unwinding of carry trades revving back up given how entrenched it had become with Japan holding rates below zero, or near zero, for so long.

The market was also concerned about the U.S. economy slowing more quickly than it had previously believed it would; and it is also concerned about the Fed making (or having already made) a policy mistake by keeping the target range for the fed funds rate unchanged at 5.25-5.50%.

This thinking kept the market in check, yet there were signs that recession fears started to moderate by the end of the week. The Atlanta Fed GDPNow model estimate for real GDP growth in the third quarter was 2.9% in the latest estimate, up from 2.5% on August 1.

A pleasing weekly jobless claims report, which showed initial claims decreasing by 17,000 to 233,000, supported the notion that concerns about a recession were overblown. Market rates jumped in another reflection of moderating recession worries.

The 10-yr note yield rose 15 basis points to 3.94% and the 2-yr note yield jumped 18 basis points to 4.05%. This week's action put some renewed pressure on the 2s10s spread, compressing it by three basis points to -11 basis points.

Earnings season continued this week. Eli Lilly (LLY) was a winning standout, gaining 10.8% in response to blowout earnings and guidance. 

Only four S&P 500 sectors closed with gains. The energy (+1.2%) and industrials (+1.2%) sectors logged the biggest gains followed by communication services (+0.8%) and financials (+0.6%). The materials sector was the worst performer, dropping 1.7%, followed by the consumer discretionary (-1.0%) and utilities (-0.9%) sectors. 

• S&P 500: +11.5% YTD
• Nasdaq Composite:+11.0% YTD
• S&P Midcap 400: +5.6% YTD
• Dow Jones Industrial Average: +4.7% YTD
• Russell 2000: +2.8% YTD

Monday:

The global sell-off that began late last week on fears about US economic growth continued to start the new week. Japan's Nikkei slumped 12% overnight, contributing to a cautious feeling in the US market. The price action in Japanese stocks was related to an unwinding of the yen carry trade following a rapid strengthening in the yen against the dollar.

The retreat had the S&P 500 flirting with correction territory and the index ultimately settled 9.3% below its high close on July 16. Just about everything came along for the downside moves.

The price action in Treasuries had the 2-yr yield briefly move below the 10-yr note yield for the first time in about 2 years.

Reviewing Monday's economic data:

• July S&P Global US Services PMI - Final 55.0; Prior 56.0
• July ISM Non-Manufacturing Index 51.4% (Briefing.com consensus 51.3%); Prior 48.8%
  • The key takeaway from the report is that overall activity in the largest sector of the U.S. economy rebounded strongly with Indices for Business Activity and Employment jumping back into expansionary territory after contracting in June.

Tuesday:

Stocks staged a recovery after Monday's sharp declines. The major indices turned slightly lower ahead of the close, but still logged gains ranging from 0.8% to 1.2%. These gains are relatively muted compared to the declines registered Monday.

The Dow Jones Industrial Average slumped more than 1,000 points Monday and won back nearly 300 points on Tuesday. The S&P 500 settled the session nearly 100 points lower than Friday's close.

The retreat in equities was partially due to the yen's rapid strengthening against the dollar, which precipitated the plunge in Japan's Nikkei. The yen weakened slightly against the dollar, acting as support for US equities and helping drive a 10% move higher in the Nikkei.

Positive responses to earnings news from Uber (UBER), Caterpillar (CAT), and others aided the upside bias, along with the observation from San Francisco Fed President Daly (FOMC voter) that policy adjustments will be necessary in the coming quarter.

Reviewing Tuesday's economic data:

• June Trade Balance -$73.1 bln (Briefing.com consensus -$72.8 bln); Prior was revised to -$75.0 bln from -$75.1 bln
  • The key takeaway from the report, though, is that both exports and imports increased in June, which is a constructive trade dynamic for the global economy.

Wednesday:

The stock market was in solid form at the start of the session, attempting to build on the rebound. Gains quickly faded and the major indices ultimately settled with declines.

The initial upside bias was driven by momentum. Also, concerns about further unwinding of carry trade positions dissipated somewhat after the Bank of Japan's Deputy Governor Uchida said the bank will not raise rates during market instability and the yen weakened against the dollar (USD/JPY +1.9% to 147.10).

The subsequent downturn was driven by growth concerns that had been put on the backburner. The afternoon retreat was broad and orderly.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index 6.9%; Prior -3.9%
• Weekly EIA Crude Oil Inventories showed a draw of 3.73 million barrels following last week's draw of 3.44 million barrels

Thursday:

Stocks rallied, leaving the major indices with sizable gains. The S&P 500 climbed 2.3%, the Russell 2000 registered a 2.4% gain, the Nasdaq Composite settled 2.9% higher, and the Dow Jones Industrial Average logged a 1.8% gain.

The upside bias followed a pleasing weekly jobless claims report at 8:30 ET. The level of initial claims decreased by 17,000 to 233,000, supporting the notion that concerns about a recession were overblown. This thinking was among the factors driving Tuesday's rebound action.

Market rates jumped after the data in another reflection of moderating recession worries.

Gains in mega caps, growth stocks, and semiconductor shares had an outsized impact on index performance. Eli Lilly (LLY 845.31, +73.17, +9.5%) was a standout in that respect after its blowout earnings report and much better-than-expected FY24 guidance.

Reviewing Thursday's economic data:

• Weekly Continuing Claims 1.875 mln; Prior was revised to 1.869 mln from 1.877 mln; Weekly Initial Claims 233K (Briefing.com consensus 242K); Prior was revised to 250K from 249K
  • The key takeaway from the report is that the downturn in initial jobless claims -- a leading indicator -- is helping to quell recession concerns.
• June Wholesale Inventories 0.2% (Briefing.com consensus 0.2%); Prior was revised to 0.5% from 0.6%

Friday:

The stock market exhibited mixed action at the index level to close out the week. There was not a lot of conviction from buyers or sellers following volatile activity this week. The three major indices ultimately settled with gains.

Gains in the mega cap space had an outsized impact on index performance. Small and mid cap stocks lagged their larger peers. 

Many other stocks participated in upside moves, though.

There was no notable US economic data on Friday.