Equity markets have taken a step back from their recent breakneck rally as volatility reemerged last week with the red hot technology sector taking the brunt of the pain as investors worried about overbought conditions and crowded trades in some areas of the market. The market turbulence overshadowed another round of economic data that continued to show gradual improvement in the recovery. For the week, the S&P 500 lost -2.3%, while the Dow slid -1.8% and the tech-heavy Nasdaq Composite dropped -3.3%. A few sectors, including materials and utilities, managed to eke out positive weeks, but the tech heavyweights dragged down major indices with the top five stocks in the S&P 500 (Apple, Microsoft, Amazon, Alphabet, and Facebook) losing a collective $522 billion in market value on Thursday and Friday, though each still stands with strong gains on the year. Despite the turbulence, which has carried into this week’s early trading, many investors see the market pullback as a healthy correction of overextended positioning and stretched valuations as equity markets pushed to new highs compared to a more gradual and uneven economic recovery.
Recent reports on U.S.-China trade relations and potential next steps in the trade conflict have also rattled market participants. The Trump Administration is weighing several options to further curb the U.S. economic relationship with China including additional tariffs and restrictions on exports of semiconductor manufacturing equipment to China’s largest semiconductor manufacturer, which would be in addition to existing chip bans against Chinese telecom giant, Huawei. Such a restriction would have significant implications for China’s ability to ramp its own electronic component production capabilities.
Despite the heightened market swings and trade rhetoric, the economic data showed steady progress this past week, including the August jobs report that showed an increase of almost 1.4 million payrolls during the month, driving the unemployment rate down to 8.4% from 10.2% in July and exceeding expectations for an unemployment reading of 9.8%. Meanwhile, weekly initial unemployment claims also dipped below 1 million with last week’s reading of 881k new claims, and the manufacturing and service sectors both remained in expansionary territory in August, according to the Institute for Supply Management. However, the numbers weren’t all positive as a closer look at the August jobs report showed permanent job losses increasing by 534k to 3.4 million as business interruptions and a slow recovery in consumer demand in some industries have forced more businesses to close their doors. Permanent job losses still remain well below the peak of 7.1 permanent losses during the Global Financial Crisis, but we will continue to watch this trend closely as the U.S. consumer remains the driving engine of U.S. economic growth.
In the week ahead, market participants will get an updated reading on inflation as well as a current picture on U.S. job openings, which will give an indication of the country’s ability to absorb the high level of displaced job seekers. Geopolitical headlines will also continue to gather a lot of attention, as would any developments on another round of stimulus relief from Congress, though the stalemate on negotiations remains for the time being. As always, our team at First Merchants Private Wealth Advisors will seek to filter out short-term noise from headlines and market volatility to provide you with a picture of the long-term fundamental trends emerging from this crisis and the implications for investment portfolios.
