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 moved a lot to go absolutely nowhere last week. Should we expect markets to continue to run in place?
Monday
Happy President’s Day!
Tuesday
S&P 500 lost 1.01% on Tuesday as tensions over the long weekend escalated in Ukraine. This marks the first time the S&P 500 closed down 10% from its closing high back on January 3rd.
Wednesday
The Markets opened in the green on Wednesday, but quickly faded to red. The S&P 500 lost 1.84%, but in a common theme as of late. The NASDAQ fell 2.57% leading the way lower. The push came as tensions continued to escalate in the standoff over Ukraine. Sanctions levied on Tuesday were followed with additional sanction threats on Wednesday.
Thursday
Late Wednesday night it was announced that conflict between Russia and Ukraine was no longer a possibility, but a reality. Markets opened deep in the red Thursday morning. As the day wore on and more governments came out condemning the move and specifying their response, markets climbed. This provided a level of certainty where buyers felt more comfortable coming back to the market. The S&P 500 ended up climbing 1.51% on the day. The NASDAQ led the way higher. The move sent the message that rate hikes may not be as frequent given geo-political upheaval.
Friday
Markets continued their march higher on Friday as the S&P 500 gained 2.24% on the day. This time, the S&P 500 led the way as investors were more measured to the impact that Ukraine will have on the Federal Reserve’s interest rate decisions.
Conclusion
While the intra-week change in the S&P 500 was as much as 5.50%, the week over week change was nominal. The week over week change itself was nominal. The S&P 500 ended up rising a meager 0.79%. One thing is for sure: volatility has spiked over the past several weeks and will likely remain in place for the next 30 days.
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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.