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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With a close eye on inflationary pressures, will the recovery continue as wanted or will they need help finding equilibrium?
Monday
Markets fell .25% on Monday as the week continued the losses from the prior week. The NASDAQ led the way lower as it has for the last couple of weeks. Although current housing statistics are lower, the NAHB housing index is holding steady at 83. Interest is there; however, material costs and a lack of inventory are stemming growth.
Tuesday
In a continued fall of market activity, the S&P 500 slid .85% Tuesday. The NASDAQ trailed the S&P 500 for a change during the fall. Both new housing starts and building permits fell in April. Lending to the pessimism about current economic conditions. This should yield a net gain as the reopening seems to be coming on slower than expected, quelling concerns about inflation.
Wednesday
The slide in market value this week continued with the S&P 500 falling .29% Wednesday. Again, the NASDAQ lagged the S&P 500 on the fall. Gold and interest rates gained on the day.
Thursday
In an attempt to stage a rebound on the week, the S&P 500 rose 1.06%. The NASDAQ led the way as the dollar weakened and concerns over inflation seemed to subside. Most of the recovery trade on the day related to initial jobless claims coming in at 444K. This is the lowest level since the start of the pandemic and the third week in a row under 500K.
Friday
The S&P 500 was little changed on Friday. Both manufacturing and services PMI information improved from the prior month. Manufacturing experienced a minor increase, while services jumped dramatically.
Conclusion
The markets as a whole continue to gauge price increases against worker production to alleviate supply shortages. The question has been whether reentry into open employment opportunities would keep pace with consumer demand. Figures show that there continues to be a slow movement back into the workforce. New housing starts fell which reflects a slower recovery in this area. Housing data eased major inflationary concerns following the spike in the Consumer Price Index (CPI) figures from April. The .43% fall for the week was not much, but enough to keep the recent trend of weekly losses continuing.
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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.