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 continued to see turbulence last week. Is there something to it, or a blip on the radar?
Monday
The week opened on a positive note as the S&P 500 shrugged off the prior week’s losses and gained 0.25% on the day. The advance was spear headed by an advance in commodity prices. This follows recent hurricane activity in the southeast.
Tuesday
Markets resumed the recent trend of falling. The S&P 500 shed 0.6% on the day, while bonds saw a safe haven bid. Core Consumer Price Index (CPI) rose by 4.0% YoY (Aug), slower than the 4.2% expected. Slowing inflationary pressure could be attributed to failing consumer sentiment but could also be easing supply side constraints.
Wednesday
The seesaw continued as markets rose sharply on Wednesday. Sharpley is relative, as the rise was 0.9%; as of late changes in value of more than 0.5% have become sharp moves. VIX is supposed to be forward looking volatility for the next month. When VIX is at 20 (currently) that would imply an expectation that moves will be less than 1%/day.
Thursday
Retail sales unexpectedly jumped, which caused a down day for equities. This is a continuation of the good news is bad news that has been occurring as of late. Unemployment data was also released on Thursday showing that initial jobless claims increased from 312K to 332K. This was largely expected with regional hurricane activity tamping down job activity. So, it carried little impact on market activity.
Friday
The week ended with a stumble as all, but one major index (including bond indices) fell on the day. Consumer sentiment remained a tepid 71.0 in September. For frame of reference the lowest level during 2020 was 71.8 in April. The concern is that a weak consumer will lead to a weak economy as consumption makes up approximately 70% of economic activity.
Conclusion
It was a week to forget for markets as the S&P 500 fell for the second week. While the weekly loss was only a little more than a half percent, the fall from the peak is now about 2.5%. A true correction would be a 10% fall, which is still a long way off. Looming ahead, however, is a debt ceiling fight, variant news (always), the rest of hurricane season, consumption concerns, and a Federal Reserve Board (FRB) meeting this week. Nothing to see here…
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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.