MANHATTAN (CN) — With little economic data on which to focus, investors continued to fret over whether the Federal Reserve is done with interest rate hikes for the year, causing markets to drop.
By the closing bell on Friday, the Dow Jones Industrial Average capped off a week’s worth of gradual losses to end down 260 points since last Friday. The S&P 500 and Nasdaq had similar trajectories and ending points, losing 58 points and 270 points for the week, respectively.
“We are in the middle of a seasonal slowdown and September’s average stock returns are the lowest of any of the 12 months,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. “But once we get through this period, if the economy continues its resilient streak, we wouldn’t be surprised to see the market higher by year end.”
As is typical around Labor Day, trades were less voluminous earlier in the week and economic data was not as robust. What data was released on the short week led investors to reinvigorate their worries the Federal Reserve might resume hiking rates.
On Wednesday, the Fed released its Beige Book, which documents changes in economic conditions. In the latest report, the Fed indicated modest economic growth during July and August, bolstering the theory the central bank will “skip” its next meeting and keep interest rates where they are.
Some pointed out that many individual Fed districts reported slowing price growth during the summer months, showing that inflation is getting under control. “Looking forward, most businesses also expect to see slowing wage growth in the near term, which again should help the Fed’s attempts to tamp down inflationary pressure,” said Sam Millette, fixed income strategist at Commonwealth Financial Network.
The report didn’t move markets much, but the comments from businesses in the report underscored the trajectory most think the U.S. economy is taking.
Jobless claims also fell this week, with the Labor Department reporting 216,000 initial unemployment claims for the week ending September 2, several thousand below what most analysts had predicted and the lowest reading since February. Last week’s unemployment ticket was revised upward slightly, but over the last four weeks the average has continued to drop.
“The job market continues to defy expectations by staying strong this entire year,” Zaccarelli said. “With a resilient labor market comes a resilient consumer, and now the bond and energy markets are coming around to the idea that the much-forecasted, consensus call of a recession in 2023 is looking less and less likely.”
Many economists have now tempered their expectations for the end of 2023. “We expect some increase in layoffs later in the year as the economy slows, but look for job losses to be relatively modest compared to prior recessions,” Nancy Van Houten, lead U.S. economist at Oxford Economics, wrote in an investor’s note. She added that the Fed is likely to keep its policy steady next month and that “more moderation in job growth will be needed to keep rate hikes permanently off the table.”
Finally, the Institute for Supply Management’s services index showed another increase, its eighth consecutive, reaching 54.5 for August. The numbers aren’t particularly high, but experts say the report shows growth has been accelerating during the third quarter.
However, the report’s “prices paid” piece also increased from 56.8 to 58.9. James Knightley, chief international economist at ING, said ISM’s data tell different stories, depending on what data point one looks at. “Just shows you how tricky it is go get a clear reading of what is going on in the economy right now and reinforces the view that a pause at the September FOMC makes sense,” he wrote in a note.
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