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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The markets soared last week. Do we have Santa to thank for this year end gift?
Monday
The S&P 500 surged to open the week. Initial indications regarding Omicron have shown less to be concerned about than originally thought. This is indicated by the resurgence of ‘reopening’ trade positions leading the way on Monday. The S&P 500 added 1.17%.
Tuesday
Markets pushed substantially higher on the day as fears around Omicron continue to fade. Technology stocks led the way as the NASDAQ out did the S&P 500. All major indices moved within reach of their all-time highs. The S&P 500 added 2.07% on the day.
Wednesday
Markets opened in the red for Wednesday as JOLT’s job openings topped 11M. A higher reading indicates availability of employment. This further justifies Federal Reserve Board (FRB) action to tighten monetary policy, which caused markets to retreat. They did claw their way out, however, as investor sentiment seems to improve every December… The S&P 500 ended the day 0.31% higher.
Thursday
The Job data keeps rolling in! Initial jobless claims came in at an incredibly low 188K. Under healthy economic conditions a normal reading would be in the low 200K range. So, these reading as of late are a strong indication of a healthy job market. Again, this is currently a net negative for stock market performance and markets slipped for the day. Good jobs data mean sooner FRB action to tighten monetary policy. The S&P 500 shed 0.71%.
Friday
Markets rose to close out the week. Much of the week was a hurry up and wait for Friday. Consumer Price index (CPI) (inflation gauge) came out Friday showing a 6.8% increase year over year. Headlines all read “The highest level since 1982!” To be clear 6.9% was expected. Also, CPI at its height in 1982 was 8.9% and for that cycle 14.8% (January, 1980). So, the positive response from markets was that the inflation increase was less than anticipated. Also, it likely means a more predictable FRB process ahead.
Conclusion
The S&P 500 added 3.82% for the week. It could be attributed to several things: strong job data, Omicron fears subsiding, or the Santa Claus Rally (yes that’s a thing). More likely it is a combination of inflation and Job data making the FRB approach increasingly predictable. It does mean less monetary accommodation, but it also means a predictable path, which investor can adjust for. This week will be important for that path as the FRB is meeting and announcing any potential changes in trajectory.
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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.