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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Growth or inflation, which will command the interest of investors? Did you see what I did there???
Monday
The movement for the day was generally in the green. This came off weekend news that the senate passed the $1.9T stimulus package. It is now headed back to congress to ratify the modifications. Late it the day interest rates surged (for the same reason) as concerns around inflation increased. This surge caused the rally to fade, and markets ended the day in the red.
Tuesday
Markets surged strong on Tuesday. Led by the NASDAQ, sending a sign that there may have been too much made of the recent inflation trade. The S&P 500 rose 1.84%, while the NASDAQ posted its strongest single day gains since November.
Wednesday
Oil inventories rose more than expected and Consumer Prices rose less than expected. Markets climbed early on the better than expected inflation data. They held onto those gains through the close.
Thursday
Markets rose on Thursday with the S&P 500 rising 1.05%. The NASDAQ, however led the way at 2.51%. Jobless claims fell to the lowest level since December. Additionally, Job openings were higher and showed promise.
Friday
The interest rate environment was back in focus as rates climbed Friday morning. With that markets started the day deep in the red. They spent the day digging out of the whole and finished in the green. A good sign, as investors felt comfortable being long the market heading into the weekend.
Conclusion
This last week was a strong week for markets, with the S&P 500 rising 2.64% on the week. While caution still exists around interest rates, markets seemed to have realized that the rising rates as a result of rapid growth expectations was actually a good thing. The anticipated inflation risks are expected to be transitory, fading by early 2022.
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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.