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 rough week for markets. Volatility is up, but will it be here to stay or are the clouds soon to part?
Monday
Markets dropped at the opening bell and gained briefly in mid-day trading; however, the S&P 500 never really gained momentum for the day. The index closed down .38% for the day. Importantly, the 10-year treasury closed above 2% for the second time in a week.
Tuesday
The S&P 500 opened in the positive at the news of easing tensions in Russia and Ukraine. PPI Figures came in slightly lower at 9.7% (Jan) compared to 9.8% (Dec) but are still high. As wholesale prices increase, the price to the consumer will also go up which is the concern with inflation. The market appeared undeterred following three day of negative trading. S&P closed up 1.58%.
Wednesday
The market looked like it was preparing for another down day in anticipation of FRB minutes from January. The S&P 500 was down 0.8% most of the day. In the end it climbed out, managing to rise 0.09%. At the same time the 10-year treasury slipped back below 2%. So, while the markets regained composure, safe haven assets were being purchased.
Thursday
The S&P 500 tumbled on Thursday, falling 1.70%. The NASDAQ led the way lower, falling 3%. Fears came from two fronts on Thursday. Markets were feeling tensions rise in the situation between Ukraine and Russia. Additionally, Federal Reserve Board (FRB) member, Bullard, spoke. He indicated the FRB would have to take more aggressive action than the markets were pricing in to fight inflation.
Friday
Markets continued the slide into Friday. The S&P 500 lost 0.72% on the day. It is not surprising to see markets sell into the long holiday weekend. It is an extended period of time for bad things to happen, given the geo-political risks at play.
Conclusion
The S&P 500 ended up losing ground by 1.57% last week. It is coming close to closing down 105, which marks a technical correction. Volatility is up and safe haven assets are catching a bid. This marks the first correction since September-October 2020. They are typically 2 to 3 months in duration. That means we still have time for some more volatility before the cloud’s part…
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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.