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.
~ Your Future… Our Services… Together! ~
Your interest in our articles helps us reach more people. To show your appreciation for this post, please “like” the article on one of the links below:
FOR MORE INFORMATION:
If you would like to receive this weekly article and other timely information follow us, here.
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.
The route of the NASDAQ picked up steam last week. What does this mean for broad markets?
Monday
Markets rebounded strongly on Monday, led by the Nasdaq that was so sorely bruised last week. The Nasdaq rose 3.01% while the S&P 500 added 2.38% on the decidedly bullish day. Leading the way were financials, technology, and industrials.
Tuesday
The day started in the red. The sell trend continued to pick up steam additional losses persisted. This happened as interest rates continued their march higher.
Wednesday
The reflation/inflation trade gathered steam on Wednesday as markets sold off strong. The S&P 500 lost 1.32% and the NASDAQ fell 2.7%. The tech sell-off strengthens as yields rise. The rise could also pose a concern for the feverish housing market as mortgage rates rise.
Thursday
The day started very mundane and in the green. That faded quickly after Federal Reserve Board (FRB) Chair Powell spoke. He said they will not raise rates any time soon, however, no potential solutions for current rate issues were given. Markets dove and interest rates rose on the lack of guidance from the FRB. Investors at this time seem to be betting against the FRB’s statements which is a dangerous stance to take. The assumption is that inflation will be meaningful enough that the FRB will react sooner than they want.
Friday
Markets started the day in the green only to fade quickly to be down as much as 1.2% for the S&P 500. Mid-morning however everything (and I mean everything) came surging back. The mid-morning low put the NASDAQ squarely in correction territory (a pull back of 10% or more). It had fallen nearly 12% from its high in February. The NASDAQ ended up more that 1.5% while the S&P 500 led the way, up almost 2%.
Conclusion
The S&P 500 rose 0.81% on the week. This was its first positive week in the last three. Recent market weakness should be indicative of a correction rather than a prolonged downturn for several reasons. Manufacturing and services are both in expansionary territory. Jobs are growing at a pace quicker than expected. Vaccinations are moving ahead of schedule. The FRB is remaining very accommodative. Additional stimulus is coming sooner than later. All the turmoil has been in fear that growth is going to be TOO strong, TOO fast, causing inflation. The fear being that it will cause corporations to miss elevated growth expectations on a higher debt burden. That said, the route of the NASDAQ is occurring on positive economic expectations, which should help lead the markets higher.
~ Your Future… Our Services… Together! ~
Your interest in our articles helps us reach more people. To show your appreciation for this post, please “like” the article on one of the links below:
FOR MORE INFORMATION:
If you would like to receive this weekly article and other timely information follow us, here.
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.