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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Bear territory was reached Friday, signaling a sustained rangebound period. Does it mean something else this time?
Monday S&P 500 0.40% | NASDAQ 1.21%
Markets swung between losses and gains throughout the day. Towards the end of the day, it became decidedly negative, closing out in the red. There was very little economic data to swing the markets one way or the other.
Tuesday S&P 500 2.02% | NASDAQ 2.76%
The jump in markets came on the back of strong retail sales. There was a fear that retail sales would weaken on strong inflation data; however, the consumer remained strong. Capacity utilization also came out yesterday at 79%. The signal tells investors of tighter economic conditions, which lend themselves to inflation when the rate is in the 80’s.
Wednesday S&P 500 4.04% | NASDAQ 4.73%
Equities continued their march lower on Wednesday. The S&P 500 broke through the psychological floor of 4000 points, but that level carries little factual weight. Housing data showed future weakness for new home sales. Additionally, oil inventories fell unexpectedly. Oil markets were up early on the news; however, they faded as the equity sell off gained steam. The main catalyst to the selloff was reports from Walmart, Target, Home Depot, and Lowe’s that detailed consumer buying behaviors. The big box stores indicated that consumer activity has shifted to more conservative buying. To the contrary, the home improvement stores have indicated no such change that consumption is showing strength.
Thursday S&P 500 0.58% | NASDAQ 0.26%
Quite often, following a market sell off, we will see a bounce the following day. Not on Thursday… Equities oscillated between gains and losses throughout the day, ultimately landing slightly lower. The S&P 500 is off approximately 19% from its high. It is inching ever closer to bear market territory (20% fall from recent highs).
Friday S&P 500 0.01% | NASDAQ 0.29%
Markets opened in the green in reaction to lending rates in China being eased. That faded quickly and the S&P 500 pushed down about 1.4%. This brought the index to 20% down from it’s high. Late in the day, markets rallied to end unchanged.
Conclusion S&P 500 3.05% | NASDAQ 3.82%
The S&P 500 fell 20% from their January highs. The significance of this is that a fall of 20% marks a bear market. During recessions, this is a market where rallies will occur (markets hang lower rather than putting in new highs). Bear markets in expansions frequently are short-term swings of losses rather than sustained down periods. At the end of 2018, we hit bear market territory and markets proceeded to rally capturing new highs throughout 2019. This may be a recent point, but it does give us hope that the storm may be almost over.
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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.