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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It was a wild ride last week. As it came to a close, markets were pointing north, but will this endure?
Monday
Markets opened the week sharply lower on Monday, with all major equity indices losing around 2% on the day. This brings the S&P 500 fall from peak, now 4.5%. This came as concerns worsened that a default by China’s Evergrande was likely on Thursday.
Tuesday
The S&P 500 came out of the gates hot as buyers attempted to ‘buy the dip’. This did not last though as markets faded into the close and the S&P 500 managed to end breakeven. Typically, it is a good sign to see investors buy back half the losses from the prior day. As it shows a purchasing appetite. That lack of appetite may be a waning after a summer of feasting.
Wednesday
Markets rose beyond VIX expectations on Wednesday. This came as Evergrande came to a deal that would help them avoid defaulting on Thursday. Additionally, the Federal Reserve bank (FRB) completed their two-day meeting. Dot plots show increased risk of rate increases in 2023. The FRB also announced that they will begin tapering later this year. In prior meetings they stated they will be discussing it, so this is a dramatic shift.
Thursday
The rise continued through Thursday as investors appeared to applaud the FRB’s effort to tighten monetary policy… Not a sentence I ever expected to write. What it does, however, is set expectations and create predictability.
Friday
The Markets ended the week mixed. The S&P 500 rose, however capping a very active week for the market. In what was a busy week for housing, we learned that new home sales rose 1.5% for August on Friday.
Conclusion
This last week started with a gash to the bottom line as markets opened the week sharply lower. Clawing its way back into the green, the S&P 500 actually rose by 22 points (or 0.5%) for the week. Regardless of how the numbers ended for the week, volatility is notably higher the last few weeks. We started the month at 16 and have ranged between 18 and 26 in September. The month is not over and more may be on tap as focus on the debt ceiling heats up.
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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.