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, but there was plenty of data. So, why did it feel like a ‘nothing to see here’ kind of week?
Monday
The markets were little moved on Monday. They are awaiting bigger news later this week as earnings season has its first test with 180 companies reporting. The S&P 500 rose 0.2% for the day.
Tuesday
The day was consistently painted in the red but ended at about breakeven. It ended only 0.90 points to the south when everything was said and done.
Wednesday
Markets were little moved for the day. Much of the day was spent waiting. First, for the Federal Reserve Board (FRB) to announce any potential changes (there were none) and second, for after-hours earnings. As a result, there was little movement on the day.
Thursday
The day started strong on the back of earnings data. GDP data released showed the US economy expanded at a rate 6.4% for the first quarter. Markets opened in the green 0.82%, they then faded to even mid-day. At the close the S&P 500 was 0.68% higher.
Friday
Markets waivered on Friday giving back all the profit from Thursday. Economic data was not the harbinger of this fall. Consumer confidence reached 88.3, above expectations.
Conclusion
I took a risk with naming the article ‘Nothing to see here.’ So those of you still reading, thanks! This was a busy week, 180 earnings announcements, an FRB decision, and a hotly awaited GDP release. For all of the turbulence that was expected, the S&P 500 moved literally 1 point! While it seems like a meaningless week, it was not. The earnings data and GDP data impressed as expected. Since goals were so high, there was a larger risk of market underperformance. Basically, the economy needed to live up to expectations and it did just that.
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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.