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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July gained more than we have seen since 2020. Is it sustainable or should the bears be feared?
Monday S&P 500 0.13% | NASDAQ 0.43%
It was a rocky start to the week. Earnings did not really get under way for the week until after market close. Tuesday carried a much thicker representation of earnings data. Early trade was quite likely focused on affairs in Ukraine that continue to make global foods supplies questionable. This impacts inflationary pressures.
Tuesday S&P 500 1.17% | NASDAQ 1.88%
Inventory was the story of the day Tuesday. Walmart reported a need to slash prices even further to induce buying. This is in an effort to alleviate an inventory buildup. This news and what it could mean for other retailers sent stocks lower. This might just be an opening salvo on how inflation gets defeated…
Wednesday S&P 500 2.62% | NASDAQ 4.06%
Markets opened in the green in anticipation of the FRB press conference later in the day. That meeting did not disappoint. The FRB raised interest rates 0.75% to 2.50%, the top end of neutral. Markets applauded the move, but more so the language surrounding the move. They sounded more dovish towards future rate hike activity given economy weakness.
Thursday S&P 500 1.21% | NASDAQ 1.08%
Welp… 2nd quarter GDP came in at -0.9%. This was the second consecutive quarter of negative GDP. With no additional context this signals a technical recession. The necessary additional context is that consumers, which makes up 70% of GDP, was positive 1% on the quarter. The drag on GDP was that much of the bottlenecks since last year have cleared and created heavy corporate inventories. Those inventories act as a negative on economic growth. Ultimately, markets rose on the decreased likelihood of an aggressive FRB.
Friday S&P 500 1.45% | NASDAQ 1.88%
Inflation, inflation, inflation… Personal Consumption Expenditures (PCE), the FRB’s preferred measure of inflation firmed in June. Headline PCE rose to 6.8%, while core PCE rose to 4.8% (removing fuel and food). On a positive note, earnings data out Friday was strong with only 2 major companies missing expectations.
Conclusion S&P 500 4.26% | NASDAQ 4.70%
Breaking with recent trends, last week gained for the second week in a row. The month of July proved to be a strong month for equities. The S&P 500 rose 9.11% and the NASDAQ was up by 12.35% in the month of July. Given that we are in a bear market, last week’s strength should be short lived. Some air will likely be taken out of those gains.
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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.