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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Jobs, jobs, jobs… Markets are climbing as the job market is delivering! Will the gains hold?
Monday
Manufacturing PMI beat expectations to open the week. PMI came in at 60.8 when 60.5 was expected. The S&P 500 ended up rising 0.18% to open the week. The Small cap markets surged substantially on the day, however, gaining over 1%.
Tuesday
The S&P 500 gained 0.40% on the day and led the way for markets. In all, it was a strong day as all major US indices were up. This may have been an anticipatory trade as it led into the Federal Reserve meeting results on Wednesday.
Wednesday
Markets hovered slightly in the red most of the day, but in the closing hour, markets surged. This came as investors were pleasantly surprised with the taper program announced. The program was assumed to end in the 2nd quarter and now is projected to end in the 3rd quarter. The S&P 500 ended up gaining .64% on the day.
Thursday
Initial jobless claims… fell to a post pandemic low! Sound familiar? It fell to 269K, inching closer to pre-pandemic norms. On-going claims fell as well, in a continuing trend as of late. The S&P 500 added 0.4% on the day.
Friday
Happy jobs Friday… No really… US employers added 531K jobs when 450K were expected. This dropped the unemployment rate to 4.6% from 4.8%. The one piece of disappointing news was the continued stagnation of the participation rate. We currently sit 1% lower than pre-pandemic levels, or roughly 1.6M workers.
Conclusion
The first week of every month is generally all about job data–this week is no different. In the coming weeks, expect the focus to shift from jobs to earnings, then ultimately, to the debt ceiling. This issue is unresolved and poses a concern for the end of November/start of December…
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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.