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 kind of heated up last week but in the wrong way. Should more of the same be expected?
Monday S&P 500 0.40% | NASDAQ 0.48%
Manufacturing data out Monday morning signaled a weaker than expected economy. It is still growing but at a slower pace than expected. This caused markets to come out of the gates hot. That momentum cooled as the day wore on. The major catalyst to this was the 10-year treasury rate climbing above 3%. This benchmark is symbolic of future rate hikes by the Federal Reserve Board (FRB).
Tuesday S&P 500 0.95% | NASDAQ 0.94%
Markets opened in the red but bounced as the 10-year treasury fell below a 3% interest rate. Energy shares benefited from a Goldman Sachs forecast that projected $140 oil this summer (currently appx. $121). Additionally, World bank projections for global growth were revised lower, which implies there will be pressure on FRB hike decisions.
Wednesday S&P 500 1.08% | NASDAQ 0.73%
Equities fell on the day. This came as oil inventories were lower than expect. Lower inventories mean higher prices, in turn, means more inflation–which ultimately, means more rate hikes…NYMEX crude oil was up over 2% on the day.
Thursday S&P 500 2.38% | NASDAQ 2.75%
Markets tumbled on Thursday on news that the ECB would begin rate hikes in the coming month. Oil markets faired better with NYMEX crude only falling 0.57%. Friday brings Consumer Price Index (CPI) data that investors may very well be priming for.
Friday S&P 500 2.91% | NASDAQ 3.52%
CPI data out Friday morning showed inflation had unexpectedly climbed to the highest level in recent history. This led to renewed selling pressure on the markets as it could create a more aggressive FRB. Interestingly, Core CPI which strips out food and fuel, actually went down. Weaker prices in those key areas would be key to renewed consumer confidence.
Conclusion S&P 500 5.66% | NASDAQ 7.05%
The prior two weeks resembled a calming in markets for the first time since March. This last week made sure no one was lulled into a false sense of stability. Volatility rose sharply on Friday, but still remains below long-term peaks. Also, the S&P 500 has fallen within striking distance of closing in a technical bear market. It should be expected that the markets will retest those lows in the near future.
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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.