Here are the economic and market highlights for the week:
- August’s nonfarm payrolls gave a mixed picture of the labor market. Businesses added 142K to their payrolls during the month, missing estimates of 161K. Provided August’s numbers hold through future revisions, the most recent report was still positive in that it showed a rebound from the downwardly revised 89K added in July and 118K added in June. August’s growth, however, stands in sharp contrast to March’s 310K hires. While hiring continues to moderate, the overall unemployment rate managed to tick down to 4.20% from 4.3%, assisted by 120K individuals joining the labor force. While the official unemployment rate is still considered tight economically speaking, the “true” unemployment rate – which includes discouraged workers and those holding part-time jobs for economic reasons – edged higher to 7.90%. This is its highest reading since October 2021. Importantly, average hourly earnings rose more than expected, rising 0.40% in August and 3.80% from a year ago.
- Weak manufacturing sounded the alarm for a U.S. economic slowdown. The ISM monthly survey of purchasing managers hit 47.2 in August. Numbers above 50 indicate expansion while those below signal contraction. New orders and production both fell during the month. Inflation also remained sticky with the prices index increasing 1.1 points on the month to 54. The outlook for the remainder of the year also looks rough with managers noting subdued demand and unwillingness by corporations to invest in capital and inventory amid high interest rates. Meanwhile, the U.S. services sector was virtually unchanged in August, up 0.10% to 51.5. Subcomponent metrics were mixed with new orders higher while production fell. Employment also slipped 0.9 points to 50.2, barely in expansion. Prices also moved higher with the prices index up 0.3 points to 57.3.
Stocks Stumble into September
Economic data this week continued to show a broad reduction in economic activity and hiring, worrying markets that downward inflection might be difficult to stave off even with a series of rate cuts over the remainder of the year. High flying tech shares took the brunt of the sell-off while bond markets rallied as investors flocked to the safety of U.S. treasuries. Manufacturing, services, and jobs data all showed signs of a slowing economy. The weak manufacturing report sparked a selloff on Tuesday, sending the Dow Jones Industrial Average down 626 points while the S&P 500 slipped 2.12%. The tech heavy Nasdaq fell 3.26% led by AI chip darling Nvidia which shed nearly $300 billion in market capitalization on the day and drove the chip sector to a more than 7% slide. As stocks slumped, investors rushed towards the safety of bonds with the 10-year U.S. treasury yield finishing Friday’s trading session at 3.716%, down from the prior week’s 3.90%. Friday capped off a tough week for investors as all major indices finished lower.
It was a truly rough start to September for all three major indices. Tuesday had stocks registering their worst trading day since August 5th and Friday’s trading pushed the S&P 500 to its worst week since March 2023. This week’s pullback is not at all surprising given that the big August rally was driven by soften economic data and narrow leadership. Equity inflows into tech drove the recent rally as investors rushed to buy the late July dip. Investors have shown little appetite for anything non-tech over the last year. Over the last twelve months, sector flows into non-tech sectors have been negative. Also working against markets, September has been a historically challenging month for investors. Dating back to 1928, the S&P 500 has averaged a monthly decline of 1.20% and finished higher only 44.3% of the time. The Dow and Nasdaq have also struggled in September, posting an average monthly drop of 1.1% and 0.90%, respectively. The Dow has recorded positive returns in September only 41.7% of the time since 1897, while the Nasdaq has finished higher 54.1% of the time since 1971. This September is likely to be even more volatile since markets will be contending with not only seasonal factors, but also with major macro influences from slowing growth and falling rates. The transition from high growth to slower growth made a pullback inevitable, but like July, many are still holding on to the buy the dip playbook believing the Fed cuts will serve as a catalyst for a year end rally. With the NASDAQ now in correction territory, it will be interesting to see if the buyers emerge next week.
The Week Ahead
A light week for economic news with CPI, PPI, and consumer sentiment being the highlights of the week.
National 401(k) Day: Friday, September 6th, 2024
Today is National 401(k) Day. The holiday is celebrated annually on the Friday after Labor Day and serves to shed light on the importance of saving for retirement. A 401(k) is an employer-offered retirement savings plan where workers contribute a portion of their paycheck into an account, and the company will often match the worker’s contributions. This gives employees an opportunity to steer funds tax sheltered into a vehicle where the money can grow through investing. The Bureau of Labor Statistics reports that only around half of workers participate in their company’s 401(k) so today’s holiday seeks to increase awareness of workplace savings. As with any savings plan, the earlier a person starts contributing money for retirement, the better positioned they are to significantly grow funds by their target retirement age due to the time value of compound interest. Compound interest is interest that is continually earned on both the principal amount and any accumulated interest, which leads to exponential growth over time. Employers often match up to 3% or 6% of each worker’s pay. Contributing enough to receive the full matching contribution — what some call “free money” — is key to optimizing your workplace savings plan and to avoiding leaving money on the table. The maximum a worker can contribute to their 401(k) is set each year by the IRS. For 2024, the contribution limit is $23,000, up from $22,500 in 2023. Individuals aged 50 and older can contribute an additional $7,500.
Check Your Balance
National 401(k) Day is a reminder to check your 401(k) balance if you have one. A financial planner or other professional advisor can evaluate your asset allocation, risk level, and performance, as well as help determine an appropriate retirement savings target – the amount you need in retirement to cover your expenses when you are no longer working and collecting a paycheck. Your retirement savings goal may depend on factors like lifestyle, income, debt, and the age you want to retire. A comprehensive retirement plan will take into consideration not only your 401(k) balance, but also any other assets and income sources you may have.
Review Your Vesting Schedule
National 401(k) Day is also a good time to review your plan’s vesting schedule. Any money that workers contribute to their 401(k) is theirs, but when it comes to employer match contributions, employees need to wait until those contributions vest. Vesting is another word for acquiring ownership. A worker may need to remain with their employer for a certain number of years to attain full ownership over the funds the company matched. It typically takes three to five years to become fully vested in employer match contributions, but vesting schedules may vary widely from company to company.
50th Anniversary of Employee Retirement Income Security Act
This month also marks the 50th anniversary of the Employee Retirement Income Security Act (ERISA) that was signed into law on September 2, 1974. ERISA is the federal law that established standards for retirement and health plans in the private sector. Passage of this legislation was inspired by the collapse of the U.S. automaker Studebaker that left almost 70% of its workers without their promised retirement benefits. Key provisions of ERISA (1) protect retirement plan assets, (2) require plans to provide essential information and education to plan participants, and (3) establish minimum standards for participation, vesting, benefit accrual, and more. The legislation also establishes fiduciary responsibilities and is intended to generally enhance and improve retirement outcomes for workers.
Probity Advisors, Inc.: Expertise in Plan Design and Management
Our retirement specialists have advised business owners in workplace retirement plan design, implementation, and administration for a range of plan types, including 401(k)s, Profit Sharing Plans, Employee Stock Ownership Plans, Simplified Employee Pension Plans, and more. We help plan sponsors fulfill their fiduciary duties under ERISA, and our deep expertise in managing workplace savings plans helps both business owners and employees achieve their retirement goals.