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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Markets were little changed last week, but the economic calendar was not light. What’s holding markets at bay?
Monday
Markets gained on Monday as the week got underway. The move was broadly bullish. We saw safe haven assets retreat while risk assets gained a bid. This rise on Monday led to record closes for many indices. While bullish, gains were meager as markets await the results of the Federal Reserve Board (FRB) meeting later this week.
Tuesday
The red-hot housing market continues to gain value as home prices rose 18% over the last 12 months. Markets pulled back from their record highs on Tuesday as durable goods orders missed expectations. On a positive note, the CB consumer confidence measure remained high at 129.1. It was expected to fall to 123.9.
Wednesday
Markets struggled to find their north early as they awaited the results of the FRB meeting. Nothing changed after the FRB meeting was over. The S&P 500 was little changed on the day. The Russell 2000 gained 1.5% on the day, however.
Thursday
Investor sentiment was buoyant on Thursday as markets rose. They did so on news that US GDP rose 6.5% for the second quarter. That gives us two consecutive quarters with GDP in excess of 6%! Additionally, new jobless claims fell to 400K.
Friday
Markets gave back the gains from Thursday and ended lower on the week. The S&P 500 lost appx .3% for the week on news that inflation pressures are persisting.
Conclusion
The rise in GDP and inflation creates a recipe (at the surface) of sooner than anticipated rate hikes from the FRB–a decision which would tamp down growth and subsequently, inflation. The FRB is acutely focused on the longevity associated with current inflation, which they view as temporary. Should it persist beyond the next several months, we may see rate increases sooner than desired.
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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.