Economic Insights

The Institute of Supply Management (ISM) has released its August services purchasing managers' index (PMI). The headline composite index is at 51.5, slightly better than the forecast. The latest reading moves the index back into expansion territory for 48th time in the past 50 months.

In the week ending August 31st, initial jobless claims were at a seasonally adjusted level of 227,000, falling to a two-month low. This represents a decrease of 5,000 from the previous week's figure and is better than the 231,000 economists were expecting.

The latest job openings and labor turnover summary (JOLTS) report showed that job openings slid in July, reflecting cooling hiring. Vacancies decreased to 7.673 million in July from June's downwardly revised level of 7.910 million. The latest reading was below the expected 8.090 million vacancies.

Here is a look at real (inflation-adjusted) charts of the S&P 500, Dow 30, and Nasdaq composite since their 2000 highs. We've updated this through the August 2024 close.

The S&P 500 real monthly averages of daily closes reached a new all-time high in July 2024. Let's examine the past to broaden our understanding of the range of historical bull and bear market trends in market performance.

Our monthly market valuation updates have long had the same conclusion: US stock indexes are significantly overvalued, which suggests cautious expectations for investment returns. On August 4, 2020, the 10-year Treasury yield hit its all-time low of 0.52%. As of August 31, it was 3.91%.

Here's an interesting set of charts that will especially resonate with those of us who follow economic and market cycles. Imagine that five years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation? The purchasing power of your investment has increased to $17,095 for an annualized real return of 10.77%.

Here is a summary of the four market valuation indicators we update on a monthly basis.

• The Crestmont Research P/E ratio
• The cyclical P/E ratio using the trailing 10-year earnings as the divisor
• The Q ratio, which is the total price of the market divided by its replacement cost
• The relationship of the S&P composite price to a regression trendline

Based on the August S&P 500 average of daily closes, the Crestmont P/E of 38.6 is 156% above its arithmetic mean, 179% above its geometric mean, and is at the 99th percentile of this 14-plus-decade series.

Here is the latest update of a popular market valuation method, Price-to-Earnings (P/E) ratio, using the most recent Standard & Poor's "as reported" earnings and earnings estimates, and the index monthly average of daily closes for the past month. The latest trailing twelve months (TTM) P/E ratio is 27.2 and the latest P/E10 ratio is 34.9.

Quick take: At the end of August, the inflation-adjusted S&P 500 index price was 164% above its long-term trend, down from July.

About the only certainty in the stock market is that, over the long haul, over-performance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.

The Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) inched up to 47.2 in August but remains in contraction territory for a fifth straight month. The index has now contracted for 21 of the past 22 months. The latest reading was worse than the forecast of 47.5.

The August S&P Global US Manufacturing PMI™ fell to 47.9 in August from 49.6 in July, indicating a modest deterioration in business conditions for a second straight month. The latest reading was just below the forecasted reading of 48.0 and is the index's lowest level of the year.

As of August 31, 2024, the 10-year note was 339 basis points above its historic closing low of 0.52% reached on August 4, 2020.

The weekly leading economic index (WLEI) is a composite for the U.S economy that draws from over 20 time-series and groups them into the following six broad categories which are then used to construct an equally weighted average. As of August 23rd, the index was at 24.827, down 1.545 from the previous week, with 4 of the 6 components in expansion territory.

The S&P 500 capped off the month of August just below its record high, finishing up 0.24% from last Friday. The index is currently 0.33% off its record close from July 16th, 2024 and is now up 19.09% year-to-date.

The BEA's core Personal Consumption Expenditures (PCE) Price Index for July showed that core inflation continues to be above the Federal Reserve's 2% long-term target at 2.6%. The July core Consumer Price Index (CPI) release was higher, at 3.2%. The Fed is on record as using core PCE data as its primary inflation gauge.

Consumer attitudes are measured by two monthly surveys: the University of Michigan’s Consumer Sentiment Index (MCSI) and the Conference Board’s Consumer Confidence Index (CCI). In August, the MCSI rose for the first time in 5 months, inching up to 67.94. Meanwhile, the CCI increased to 103.3, its highest level in 6 months.

Personal income (excluding transfer receipts) rose 0.32% in July and is up 4.1% year-over-year. However, when adjusted for inflation using the BEA's PCE Price Index, real personal income (excluding transfer receipts) was up 0.16% month-over-month and up 1.6% year-over-year.

Consumer sentiment rose for the first time in five months, according to the final August report for the Michigan Consumer Sentiment Index. The index rose 1.5 points (2.3%) from July's final reading to 67.9. The latest reading was above the forecast of 67.8.

The latest Chicago Purchasing Manager's Index (Chicago Business Barometer) edged up to 46.1 in August from 45.3 in July. The latest reading is better than the 45.0 forecast but keeps the index in contraction territory for a ninth straight month.

With the release of July's report on personal incomes and outlays, we can now take a closer look at "real" disposable personal income per capita. At two decimal places, the nominal 0.21% month-over-month change in disposable income comes to 0.06% when we adjust for inflation. The year-over-year metrics are 3.09% nominal and 0.58% real.

The BEA's Personal Income and Outlays report revealed inflation remained at its lowest level since early 2021. The PCE price index, the Fed's favored measure of inflation, was up 2.5% year-over-year, just below the forecasted 2.6% growth. On a monthly basis, PCE inflation was up 0.2% from June, as expected.

The second estimate for Q2 GDP came in at 2.95%, an acceleration from 1.41% for the Q1 final estimate. With a per-capita adjustment, the headline number is lower at 2.48%, a pickup from 0.95% for the Q1 headline number.

The U.S. economy grew at a faster than expected pace during the second quarter of this year. Real gross domestic product increased at an annual rate of 2.95% in Q2 2024, according to the second estimate. The latest estimate is above the forecasted 2.8% growth and is a pickup from the Q1 2023 GDP final estimate of 1.4%.

The National Association of Realtors® (NAR)unexpectedly fell 5.5% in July to 70.2, its lowest level in history. Pending home sales were expected to inch up 0.2% from the previous month. The index is down 8.5% from one year ago.