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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Another down week led by the NASDAQ. Are there signs of hope in the long term forecast though?
Monday S&P 500 0.57% | NASDAQ 1.63%
Equity markets were in no mood to be boring on Monday. The markets opened choppy, oscillating between green and red. At one point, the 10-year treasury got above 3%, sending equity markets decidedly lower. At another point, the S&P 500 was 1.67% lower on the day. Late in the day, with one hour of trading left, markets rallied back to end in the green.
Tuesday S&P 500 0.48% | NASDAQ 0.22%
The growth story stayed relatively contained on Tuesday as the Federal Reserve Board (FRB) press conference is on Wednesday. Every time the markets tried to break out, they clawed back down. The 10-year treasury rate floated lower early and closed nearly unchanged.
Wednesday S&P 500 2.99% | NASDAQ 3.19%
The FRB delivered what the markets were expecting. They lifted the Fed Funds Rate by 0.50% and committed to rolling off their balance sheet starting June 1st. The commitment will eventually get to $95B, however that won’t be until September. The S&P 500 traded sideways until the data from the FRB was available, after which markets soared into the close. The 10-year treasury was little changed, indicating that the FRB hike was baked in already.
Thursday S&P 500 3.56% | NASDAQ 4.99%
The entire week of positivity was reversed in one broad selloff. The S&P 500 is currently off 13.54% and the Tech heavy NASDAQ is currently off 22.20%. The broad market move says that while the FRB was less fierce than expected, they are being aggressive with policy. That aspect does not change the expected decrease in revenue for US companies.
Friday S&P 500 0.62% | NASDAQ 1.45%
Happy Jobs Day! Jobs data held strong as the unemployment rate remained at 3.6% and the US added over 400K jobs in April. The participation rate is holding at 62.2%. Additionally, wage growth increased 5.5% annually. This rate keeps pace with Core PCE (a key indication of inflation). This could reflect a stickier inflation environment. Markets reacted negatively to the good news. It signals more room for the FRB to raise rates without having to worry about the job market.
Conclusion S&P 500 0.21% | NASDAQ 1.54%
The FRB is working to provide enough restriction to quell inflation, but not enough to cause a recession. The last time that effectively occurred was in 1994. The FRB aggressively rose rates to keep inflation at bay. If the FRB could successfully achieve a ’soft landing’, the follow-on story to the early ‘90’s was great. That five-year period of growth in the late ‘90’s has been unrivaled. It is still to be seen if the FRB can achieve that soft landing. If they do, they may set the table for a growth heavy period for the next few years.
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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.