Weekend Update #254
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Markets were volatile this week as large-cap tech and AI stocks sold off sharply, erasing nearly $1 trillion in market value amid growing concerns about overextended valuations. Although many companies reported strong earnings beats, investors reacted cautiously, with muted gains for winners and steep losses for companies that missed expectations. Sentiment weakened further after Federal Reserve officials signaled that a rate cut may be delayed, dampening risk appetite. Consumer confidence fell to its lowest level since mid-2022 as worries about a prolonged government shutdown — now estimated to last 46 days, according to prediction market Kalshi — and broader economic uncertainty took hold.
U.S. factory activity continued to contract in October, marking the eighth consecutive month of decline. The ISM Manufacturing Index slipped to 48.7 as subdued demand and lower production weighed on output. Both production and employment remained in contraction, underscoring persistent weakness across the sector. A dozen industries, led by textiles and furniture, reported declines, while only six, including primary metals and transportation equipment, expanded. Although manufacturers cited ongoing uncertainty around trade policy, easing input costs provided some offset, with the prices-paid index falling to 58, the lowest level this year.
While manufacturing remains under pressure, the services side of the economy showed renewed strength. The ISM Services Index climbed to 52.4, the fastest pace of expansion in eight months, driven by a sharp rebound in new orders and business activity. The new orders gauge jumped to a one-year high of 56.2, signaling firm underlying demand across industries such as food services, retail, and wholesale trade. However, this improvement came with renewed inflationary pressures, as the prices-paid index rose to a three-year high of 70, suggesting that services firms are absorbing higher input costs even as manufacturing price pressures ease. Employment trends in services showed tentative improvement, with job losses slowing for a second month.
Labor market data reinforced this mixed picture of stabilization amid strain. Private-sector payrolls increased by 42,000 in October, according to ADP, following two months of declines and signaling that hiring is stabilizing at a modest pace. However, large-scale layoffs continued to mount. U.S. employers announced 153,000 job cuts in October, nearly triple the total from a year earlier and the most for any October since 2003, led by the technology and warehousing sectors. Year-to-date cuts have surpassed one million, the most since the pandemic, while hiring plans remain at decade lows. State data suggests initial jobless claims edged up to 228,000 but remain historically low, with furloughed federal workers contributing to recent increases amid the government shutdown.
Against this backdrop, consumer sentiment deteriorated sharply. The University of Michigan’s Consumer Sentiment Index fell to 50.3 in November, the lowest level since mid-2022, reflecting mounting pessimism about personal finances and the labor market rather than inflation. The share of consumers expecting unemployment to rise in the year ahead jumped to 71 percent, more than double last year’s level. Income perceptions weakened notably, with the largest share of respondents citing weak earnings since 2020, and buying conditions deteriorated across homes, vehicles, and major household goods. Although shutdown-related uncertainty likely amplified the decline, the broad-based drop across political groups suggests a deeper erosion of confidence in the economic outlook.
Overall, the latest data depict an economy losing momentum as manufacturing remains mired in contraction, services expand but face rising costs, and consumers grow increasingly cautious amid signs of a softening labor market.
Friday’s Close (Weekly Performance)
S&P 500 6,728.80 (-1.63%)
Nasdaq 23,004.54 (-3.04%)
Dow Jones 46,987.10 (-1.21%)
Thank you Blue Room Senior Analyst NICK PEART
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