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 quiet week for markets. Is this just the calm before the storm, or should we expect this to continue?
Monday
Markets were little changed on Monday. Literally the S&P 500 fell 0.05 points on the day. Oil occupied attention on the day as OPEC+ did not agree to increase production. This will likely leave us with elevated fuel prices for some time. In response, the US is considering releasing some strategic reserves to ease prices slightly, but no action was taken.
Tuesday
Retail sales dominated focus on Tuesday as they jumped a surprising 1.7% in October. This led to a buy sentiment among investors as the S&P 500 gained 0.38% on the day. This was either a sign of things to come or people getting ahead of anticipated inventory shortages this holiday season. To be determined…
Wednesday
Inflation concerns were stoked on Wednesday as oil inventories shrank when they were expected to expand. The S&P 500 contracted 0.26% on the day as those fears were in focus.
Thursday
All that was lost on Wednesday was recaptured on Thursday. Jobs data released showed that once again the pandemic job market is improving. Initial jobless claims fell to 268K, the lowest since the start of the pandemic. More importantly, on-going claims have fallen to 2.080M, again another low. The pre-pandemic level was roughly 1.7M.
Friday
COVID closures dominated the headlines and the market on Friday. With no economic data reporting on Friday, the focus was squarely on Austria. COVID closures may become more prevalent in coming weeks as colder weather sets in on Europe. Markets slipped, but not hard. The S&P 500 dropped 0.13% on the day.
Conclusion
The S&P 500 gained 0.32% on the week. Not a particularly interesting week, however, expect the volume on trading to ratchet up after the upcoming holiday. The debt ceiling still needs resolving by December 3rd. Unfortunately, rather than being resolved in the 11th hour, this may push out days passed that deadline. The treasury projects that they have the funds to keep the lights on till 12-15-21. We may see political wrangling until closer to that date. That wrangling will likely cause market volatility.
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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.