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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Rates were more subdued last week. Has inflation been overblown or will rates continue to climb in response?
Monday
Investors attempted to move higher at the open of the week, but they failed… The S&P 500 ended up losing 0.8%. A 3% rise in oil prices stoked concerns that inflation was going to persist.
Tuesday
Markets slipped as the S&P 500 lost 0.4% on the day. Earnings season starts in earnest this week with most major banks reporting. Concerns lie not with current performance but rather the forwarding guidance. The expectation is that companies will begin to reference the impact inflation will have on future performance.
Wednesday
The S&P 500 rose 0.3% on earnings data. Economic data was not aiding markets as headline inflation rose to 5.4% YoY in September. Softer core inflation caused interest rates to slip though. This could cause the Federal Reserve Bank (FRB) to delay the start of tapering. An overall dovish policy move that favors growth stocks.
Thursday
Investors drove the market higher at the open as employment data improved. For the first time since the start of the pandemic initial jobless claims fell below 300K. Markets were able to hang on to the gains as the S&P 500 rose 1.7% on the day!
Friday
Markets moved up to close the week. The S&P 500 rose 0.75% on the day. Markets jumped at the open on unexpectedly strong retail data for September, closing out the 3rd quarter. After the jump at open, investors coasted into the close.
Conclusion
The S&P rose nearly 2% on the week, while yields started to shrug back from their highs a few weeks ago. Interest rates are still expected to be on the rise from a cyclical standpoint. The tactical move lower is not surprising considering the shock to the upside over the last month.
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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.