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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Last week felt like Opposite Day. Will this continue or will data begin to be better represented on the markets?
Monday S&P 500 3.20% | NASDAQ 4.29%
Markets tumbled to open the week. The elevated volatility makes the day’s move far too common. The interesting move on the day was that it was a red day for most sectors. Equities and oil will contradict each other typically, however, they all fell on the day. The 2-year and 10-year yields both fell for the day (Yields and prices move in opposite directions). It what appear to be a safe haven bid for markets.
Tuesday S&P 500 0.25% | NASDAQ 0.98%
The day started firmly in the green as markets attempted to rebound losses from Monday. Those faded as the day wore on, but markets did remain in the green. Also making gains, was treasury prices as yields fell slightly.
Wednesday S&P 500 1.65% | NASDAQ 3.18%
Consumer Price Index (CPI) data came out on Wednesday. It showed that inflation softens slightly year over year, but less than was expected. The resilience of inflation will likely mean the aggressive nature of the Federal Reserve Board (FRB) should continue.
Thursday S&P 500 0.13% | NASDAQ 0.06%
Jobs data showed continued strength in the job market, to no one’s surprise. Additionally, the Producer Price Index (PPI) showed corporate inflationary pressure is persisting. PPI measures input costs for companies and is often a tell on if consumers should expect retail prices to rise. Markets were little changed on the day.
Friday S&P 500 2.39% | NASDAQ 3.82%
Markets rallied broadly on Friday. This was in spite of Consumer Confidence coming in weaker than expected. It is not surprising, as a weaker consumer creates less inflationary pressure. Less inflationary pressure means less cause for the FRB to be more aggressive on rates.
Conclusion S&P 500 2.41% | NASDAQ 2.80%
My kids like to play opposite day quite frequently. Yeah Dad, I cleaned my room… nope… Yeah Dad, I emptied the dish washer… really… Apparently, the stock market is taking a lesson from my kiddos. Good economic data, while good for the economy, signals a more aggressive FRB which will hurt future earnings prospects. Bad economic data, while bad for the economy, signals a more restrained FRB and therefore bodes well for future earnings. Look for opposite day to last the next year or so…
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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.