Stocks saw first down month in August since February. Given the strong gains we have seen so far this year, some consolidation of gains is not unusual while cyclical leadership remains encouraging.

Business Surveys Remain Consistent with a Growing Economy

The ISM Services PMI (a timely and closely followed business survey) increased to the highest level since February and suggests an acceleration in services activity midway through the third quarter. The service sector comprises most of the economy, and the current PMI is historically consistent with continued trend-like economic growth. According to the ISM, it corresponds with a 1.6% annualized growth rate in the economy.

The ISM Manufacturing PMI rose in August to a six-month high. While the index has been in contraction territory since last November, the pickup over the past two months indicates a slower rate of decline, and points to some stabilization in factory activity. Growth remained narrow, with only five of the 18 industries expanding. But that was an improvement over the prior month when only two industries grew.

Friday’s Employment Report Confirms Cooling in the Overheated Labor Market

Friday’s release of the August jobs report confirms the cooling of the labor market that we saw earlier last week with the JOLTS report which showed job openings falling again in July and down in six of the past seven months. Nonfarm payrolls increased by 187,000 with private employer payrolls increasing 179,000. There were steep downward revisions to prior months which brought the three-month average of private job growth to 140,000. This is the lowest level of private job growth in this expansion, signaling that job growth has slowed substantially.

The unemployment rate unexpectedly jumped to 3.8% from 3.5%, the largest increase this cycle and the highest level since February 2022. This was driven in large part by an impressive pick-up in the participation rate which jumped 0.2 points to 62.8%, a new recovery high. A major objective of the Fed’s interest rate hiking campaign has been to bring better balance in the labor market. This report along with the JOLTS report suggests this is occurring. As a result, interest rate markets are assigning a 93% probability of no rate hike at the upcoming September Fed meeting.

Despite the cooling of the labor market, jobless claims, which are a timely and accurate indicator of the economy’s health, remain consistent with a growing economy. Given other still healthy economic readings including the business surveys discussed above, these labor market indicators suggest an increased probability that the Fed can achieve its intended goal of a soft landing for the economy.

August Sees First Down Month since February but Cyclicals Still Showing Leadership

Given the strong market gains we have seen year-to-date with the S&P 500 Index up 18.7% through August, it is not unusual to see stocks undergo some consolidation of their gains. The S&P 500 fell 1.8% in August, registering its first monthly decline since February. All sectors other than Energy finished the month in negative territory. Despite the broad weakness, leadership remains cyclical, with defensive lowbeta sectors of Utilities and Consumer Staples finishing as the worst performers for the month.