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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Oil fell and markets fell with them. Why did the inflation maker not have a positive impact on equities?
Monday S&P 500 0.02% | NASDAQ 0.14%
Market movement was choppy all day. They ended up roughly unchanged. Investors were digesting elevated Russian activity in Ukraine and mixed earnings data. An outperformer was Bank of America as they capitalized on consumer lending, which will likely slow in the second quarter.
Tuesday S&P 500 1.61% | NASDAQ 2.15%
Stocks came out of the gates smoking hot on Tuesday. Yields were rising, which would typically signal a stronger S&P 500, but it was NASDAQ that led the way. This came as a result of weaker energy prices. That would signal weaker inflation and less impetus for rate hikes.
Wednesday S&P 500 0.06% | NASDAQ 1.22%
Markets ebbed and flowed between gains and losses throughout the day. Crude inventories fell more than expected, causing oil prices to be more volatile on the day. Earnings data performed well with the exception of United Airlines.
Thursday S&P 500 1.50% | NASDAQ 2.06%
The trading day started red hot with the S&P 500 up over 1%; however, that faded immediately. The fade came as yields pressed higher. Equities sold off as inflationary pressures lead us to persistent rate hikes likely throughout next year.
Friday S&P 500 2.77% | NASDAQ 2.55%
The selling continued into Friday. The pressure on yields continued and oil prices continued to ease. Those easing prices did nothing to buoy stocks. Oil prices struggled as a result of continued lockdowns in Shanghai. The lack of demand from that region has dampened prices.
Conclusion S&P 500 2.60% | NASDAQ 3.60%
Oil Prices have softened over the last week. On the surface, this can be seen as a positive as it would signal weaker inflationary pressures over the next several weeks (and if it persists, months). “If it persists” is the key, however. The current move in oil prices has to do with slowing demand as Shanghai remains under a COVID related lockdown. If they were to reopen soon, that demand comes back online. More concerning is the impact their closure will have on supply lines a few months from now. Our demand will deplete inventories and shelves likely will not be restocked in time for that depletion. This will further delay the softening of inflationary factor.
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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.