Here are the economic and market highlights for the week:
- The U.S. Services sector returned to growth in July, countering fears of an imminent recession. The ISM Services Index rose to 51.4 in July, up from June’s reading of 48.8. Readings above 50 indicate expansion in the services sector. The survey’s underlying subcomponent measures also pointed to continued economic growth. The employment gauge rose five points, coming out of contraction for a reading of 51.1. That broke a five-month string of negative readings and hit the highest level since last fall. Meanwhile, the business activity and new orders indexes also came out of contraction while inventories, new orders and backlogs all posted sharp gains. Notably, there was no mention among survey respondents of a looming recession in the services sector – which constitutes 70% of economic activity.
- In another positive sign for the U.S. economy, initial jobless claims fell to 233K, down 17K from the previous week. The drop added to evidence that weather and seasonal auto plant shutdowns were responsible for last week’s rise. It also helped ease concerns of a weakening labor market following last Friday’s jobs report which showed just 114K added to the payrolls in July.
Fundamentals Hold Up Even as Sentiment Swings
A perfect storm of lingering recession concerns following last week’s lackluster reports, overly crowded trades, and a burst of momentum led to another wild trading week on Wall Street. The Dow Jones Industrial Average tumbled 1,000+ points on Monday, having watched Japan’s Nikkei crater over the weekend in a moment reminiscent of 1987’s Black Friday. The fundamental basis for the global route was ostensibly a reaction to last Friday’s weak U.S. jobs report and the fear of a recession, but the sell-off gained momentum as traders rushed to close leveraged positions. The combination of Japan’s central bank having recently raised rates, along with the dreaded r-word spreading domestically, spooked global markets and had traders rushing to exit a popular trading strategy, the yen carry trade. The strategy involves borrowing in the cheaper yen currency and investing in higher yielding assets abroad. The trade works well when borrowing rates are expected to remain super-low for an extended period of time. With the Bank of Japan (BOJ) announcing it would begin raising rates and the Federal Reserve and other global central banks dialing back rates on the prospect of slowing growth, traders rushed to close positions. However, on Wednesday, the BOJ bowed to markets, walking back its tightening bias and pledging not to raise rates when markets are unstable. That announcement combined with news that the U.S. services sector returned to growth in July and a drop in weekly jobless claims helped ease concerns of a U.S. recession. By the week’s end, investor sentiment had swung from risk-off back to risk-on to close out the week.
With no major news released on Friday, trading was subdued but markets rose through the afternoon, resulting in the S&P 500 finishing flat on the week. This is quite a reversal considering the S&P 500 was down over 4% at one point on Monday. There is no question that the economy is decelerating, particularly the labor market, but things are not as bad as the volatility would have one believe. The Atlanta Fed’s GDPNow model is forecasting Q3 GDP growth of 2.90% which is hardly recessionary. The consumer for the time being is still looking strong, helping push the services sector back into expansion in July. The bond market – which is typically considered a bellwether for recessions – is not behaving as if we are headed towards recession. The 10-year treasury is still kissing 4%, option-adjusted spreads are higher but tightening, and corporations remain able to issue debt. You’d think that with all the turmoil values would be plentiful, but that is not the case. Despite the recent market swings, little value seems to have been unearthed for investors whether in stocks or bonds. Despite the new “sky is falling” talk, markets are essentially where they were in May when the enthusiasm over rate cuts was barely being contained by the angst inflation could rear its head again. We’re on the other side of that coin now, and it is natural for recession to be a consideration, but this week’s volatility should not be confused with deeper cracks in underlying fundamentals.
The Week Ahead
- Retail Sales
- CPI Index
How Boredom Benefits Our Brains
With summer drawing to a close, some might be suffering from a case of the summer doldrums. The term “doldrums” is a nautical term referring to a region near the equator where the winds are light and unpredictable, often leaving sailing ships stranded. Historically, sailors experienced periods of stagnation during the calm summer months, leading to the use of “doldrums” to describe a state of inertia or lack of energy. Over time, the term evolved to encompass a broader sense of lethargy and inactivity experienced during the summer season.
During the summer doldrums, higher temperatures and humidity can cause activity to wane. It simply doesn’t feel as enjoyable to go for that outdoor run, dine on your favorite restaurant patio, take the dog for a walk, attend a sporting event, or perhaps even leave the house. This can lead to feelings of boredom as people struggle to stay motivated and active in the warmer temperatures. The good news is the summer doldrums are scientifically proven to benefit our brains.
Scientists are conducting research to better understand the benefits of boredom to our brains. Cognitive neuroscientist James Danckert has been studying boredom for more than 15 years, and he shares that boredom acts similarly to pain. Pain is not intended to hurt us, but rather it’s our body’s way of telling us something is wrong and that we need to do something to fix it. Danckert says that boredom plays a similar role by telling us that what we are doing isn’t working. It serves as a call to action by telling us we are not effectively engaging with the world around us in a purposeful and meaningful way. Danckert explains that boredom challenges us to find some activity that allows us to showcase our skills and talents. It pushes us to act and reach our full potential.
Similar to Danckert’s findings, researcher Erin Westgate from the Social Cognition and Emotion Lab at Florida State University explains that boredom tells us that what we are doing is not a good fit for the mental or emotional resources we have at the time. It may be that the task at hand is too easy, too hard, or it may not be personally meaningful. Westgate adds that boredom is beneficial because it gives us important feedback our brains and bodies need to redirect our focus. Westgate writes that boredom serves as a signal when we are not meaningfully engaged in our lives, giving us the opportunity to make a positive shift.
Neuroscientist Alicia Walf, a researcher in the Department of Cognitive Science at Rensselaer Polytechnic Institute in New York, says it’s critical for brain health to let your brain be bored. Walf says that being bored improves social connections. Studies that look at brain activity when people do a specific cognitive task versus when they “do nothing” indicate that there is still extensive brain activity in the do nothing part of the experiment. The research showed that when we disengage from doing things, we focus inward as well as on social interactions.
Many brilliant minds have said their most creative ideas and insights have come to them when they are doing something that doesn’t require a lot of thought or focus, such as taking a shower or pulling weeds. We can ditch the proverb that an idle brain is the devil’s workshop and welcome the summer doldrums as an opportunity boost our brain health.