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 gained on the week. As earnings slow down, will consumers be able to power a 4th quarter boom?
Monday
Markets opened the week with a sigh as the S&P 500 rose 0.09% with not a whole lot of momentum. This reaction lowered VIX understandably. Forward looking volatility is becoming fairly low for the next month.
Tuesday
The Markets decided to turn on Tuesday, ending a long streak of daily gains. The S&P 500 shed 0.4% on the day. Producer Price figures weighed on investors as it showed that there was still inflationary pressure on companies. The fear being that inflation will be passed through to the consumer in the near future.
Wednesday
Initial jobless claims impressed on Wednesday, coming in at 267K, again the lowest mark since the start of the pandemic. However, this was not enough to prevent a continued slide on the markets. The S&P 500 shed an additional 0.8% on the day as the Consumer Price Index (CPI) rose more than expected. It came in at 6.3% YoY for October.
Thursday
The S&P 500 was fairly unchanged on the day; however, safe haven asset classes all caught a bid on the day (minus bonds). Bond markets were closed in observance of the Veteran’s Day holiday.
Friday
Markets surged into the close of the week. The S&P 500 gained 0.72% on the day and a 1.68% gain for the week! The JOLT’s job openings came in strong again at over 10M openings. This, coupled with higher job adds, is encouraging for where the job market will be heading. Impressively, we are already sub 5% unemployment, so the slack in the economy should start to tighten.
Conclusion
On Friday, consumer sentiment was projected to come in low for November. With retail sales reporting this week, it will be interesting to see if the divergence between the two continues. Although consumers say they are not bullish on the economy, actual spending would suggest otherwise. Retail sales have been strong the last few months. This could be pre-emptive shopping with light inventory expectations for the holidays; however, I think it’s continued strong consumer spending. The holiday spend will likely be large after the quiet 2020 holiday season.
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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.