The monitor flashed quite a bit of red last month. But the market was seemingly undeterred and pushed higher anyway. Should this continue?
Fixed Income: 2-Yr Treas Yield 3.91% | 10-Yr Treas. Yield 3.91%
The bond markets saw volatility in August as questions mounted about an impromptu rate-cut by the Federal Reserve Bank (FRB). The most meaningful fall came at the beginning of the month. The perceived weakness in jobs data prompted a move to safety as expectations increased for a rate cut. At the time, people were calling for 0.50% before the September meeting. Cooler heads prevailed and the market is now expecting a 0.25% cut in September. The more impressive data point over the last month was the parody reached on the last trading day of August. This was the first time the two closed at parity since July 5th, 2022! It is still to be determined if rate normalization (higher rates on longer dated fixed income) will prevail. It is a good sign that the anticipated rate cuts are making a large enough impact for us to reach parity.
Equities: Dow Jones 1.76% | S&P 500 2.28% | NASDAQ 0.65%
The market moves that led to a strong month for fixed income signaled weakness for the equity markets. The Nasdaq lost almost four percent in the first week of the month to spend the next two weeks crawling out of that hole. The last week of the month saw the index continue to falter. Strong earnings from bellwether Nvidia (NVDA) was not enough to bolster confidence. Investors seemed to come to the realization that the FRB will likely take a slow methodical path towards rate reductions. That path did not buoy equity markets. In a retracement of the July trades, other major market categories failed to capitalize on weaker large caps:
S&P 400 (Mid Cap Index): 0.21%
Russell 2000 (Small Cap Index): 1.59%
Conclusion
It was, in all, a good month… That’s for two reasons, 1) fixed income made up ground that equities lost, 2) the spread between the 2-yr treasury and the 10-yr treasury reached parity. Something of a signal that the soft landing the FRB is looking for has been achieved. Generally, a recession (that would be evident by this point) would have caused a normalization of the curve.
A Look Ahead…
We see two key reasons to expect further volatility in equity markets during the next month:
- The 22.40 price to earnings (P/E) ratio for the S&P 500 will need to narrow further before markets can start a real rally.
- September is notoriously the worst month of the year for equities:
- 2023: 5.35%
- 2022: 8.92%
- 2021: 4.89%
- 2020: 4.12%
- 2019: 2.32%
Some logic would point to the high frequency in recent years being a signal that volatility should weaken in September. I find that unlikely given the elevated P/E referenced.
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After three weeks of loss, the S&P 500 eked out a gain for the week. Is there more to come?
Monday
Markets surged ahead on Monday attempting to make up ground from the last few weeks of declines. The S&P 500 rose .95% on the day. The Nasdaq led the way higher as it rose 1.4%.
Tuesday
Housing ruled the day for the markets on Tuesday. Markets ended the day mildly lower than they began. Elevated home prices (13.9% increase) and reduced new home sales (-5.9%) contributed largely to sentiment on the day.
Wednesday
The Russell 2000 (small cap stocks) led the way in gains for the day (2%). The major indices rose mildly for the day as it was a light economic calendar leading up to Thursday’s jobs data.
Thursday
Economic data was strong on Thursday, but the market reaction was tepid. Core durable goods increased more than expected and last months figure was revised to double the previous estimate. Weekly initial jobless claims data improved and remains under 500K for the fourth week in a row. It reached a post pandemic low of 404K this week.
Friday
Core Personal Consumption Expenditures (PCE) index rose to 3.1% YoY in April. This is the Federal Reserve Board’s (FRB) preferred measure of inflation. It gives us insight into how the FRB may react with rates. Michigan Consumer Sentiment fell to 82.9 for May. These data points led the S&P 500 higher for the day by 0.08%.
Conclusion
The S&P 500 staged a bit of a rebound this week. Between favorable jobs data, durable goods data, and a housing market that is seeing plenty of demand the reflation trade is well under way. The difficult thing will be for it to live up to expectations as it unfolds. This week, however, it did as the S&P 500 managed to gain 48.25 points and is up 11.93% year to date.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.