Market Insights

Almost three years ago, investors thought the Federal Reserve was behind the curve on inflation. Now they have just the opposite fear.

The S&P 500 slid 2.1 percent between Friday, July 26, and Friday, August 2. It was the third consecutive negative week, dragging the index back to levels from mid-June. Technology stocks, especially semiconductors, continued to lead the selling.

Almost every economic number missed estimates:

• Non-farm payrolls increased by just 114,000 last month. It was the lowest reading since January 2021, missing the 175,000 gain expected by economists.
• Unemployment rose more than expected to 4.3 percent, the highest since October 2021.
• Initial jobless claims were higher than forecast. Continuing claims, which measure ongoing joblessness, hit a 33-month high.
• The Institute for Supply Management’s Manufacturing Index also missed estimates as new orders weakened.

The Fed nonetheless left interest rates unchanged and was noncommittal about future cuts. That made some investors worry policymakers will let the economy slow or drift into a recession.

Bond yields plunged in response. The yield on the 10-year Treasury note declined almost 41 basis points — the biggest drop since the coronavirus pandemic in March 2020, according to TradeStation data.

Summer Seasonality

Another issue is the lack of catalysts over the next month. Most of the big earnings reports are now done and the next Fed meeting won’t happen until September 18. Even the inflation report next week may have less impact because markets now firmly believe policymakers will start cutting rates.

That kind of summer doldrums has been mostly bearish in recent years. For example, the S&P 500 has declined the last two Augusts and the last four Septembers. Some investors may also expect a pause after gains in eight of the last nine months.

Apple (AAPL) was an exception to the selling pressure last week, holding its ground after results beat estimates. Some analysts saw evidence that its new AI initiatives are paying off and could drive an iPhone upgrade cycle.

Amazon.com (AMZN), on the other hand, had its biggest drop in more than two years on Friday after revenue missed consensus forecasts.

Chips Plunge

The Philadelphia Semiconductor Index fell 9.7 percent. That was its biggest weekly drop since January 2022, when the last bear market began.

Part of the decline resulted from Intel (INTC) cutting guidance. Its resulting 32 percent selloff represented INTC’s worst week since the stock market’s infamous crash in October 1987.

Banks tumbled, giving back sharp gains from the two previous weeks. Energy and small caps also struggled. That kind of weakness in economically sensitive sectors is consistent with fears of a slower economy.

Utilities and real estate investment trusts, on the other hand, climbed. Those groups would potentially benefit from lower interest rates.

Communications also rose, in part because of strong quarterly results from Meta Platforms (META), T-Mobile US (TMUS) and Match (MTCH).

Moderna (MRNA) had its biggest weekly drop since 2021 after weak coronavirus vaccine sales hurt guidance.

Western Digital (WDC) and Micron Technology (MU) were both swept up in the broader chip selloff.

Charting the Market

Last week’s pullback continued a trend of weakening momentum since mid-July. For example, the S&P 500 tested its 100-day moving average for the first time since November.

Second, the index formed a bearish outside day after testing its close on July 23. (One day before the index had a sharp selloff.) It also broke a series of higher lows, which some chart watchers may view as a bearish flag.

Given the increased volatility following a long period of calm, some traders may expect sharper moves in August. Will they brace for a drop closer to the May 31 low of 5,192?

The Japanese yen has also rapidly appreciated against the U.S. dollar in the last month. That might have a negative impact on sentiment based on patterns in previous years when investors sold the Japanese currency to buy risk assets.

The Week Ahead

This week has less economic data but lots of earnings.

The Institute for Supply Management’s service-sector index is due today and CSX (CSX) issues results in the afternoon. Mary Daly, a voting member of the Fed’s policy committee, also speaks.

Caterpillar (CAT), Amgen (AMGN) and Super Micro Computer (SMCI) are two of the big names tomorrow.

Wednesday features crude-oil inventories.

Thursday brings initial jobless claims and a speech from Fed policymaker Thomas Barkin. Eli Lilly (LLY), Expedia (EXPE) and Gilead Sciences (GILD) report earnings.

Nothing important is scheduled for Friday.

The following week starting August 12 is more active. It has key inflation data and earnings from big retailers including Walmart (WMT) and Home Depot (HD).