Soft Landing?

TITLE: INVESTMENT ADVISER REPRESENTATIVE

TAGS: S&P 500, NASDAQ, Yield Curve, FRB, Rates, Nvidia

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 5^th, 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 retreated further on aggressive Fed intervention. Can they avoid thwarting economic growth and manufacture a “soft landing”?

Monday S&P 500 3.88% | NASDAQ 4.68%

Monday began much as Friday ended. Markets headed south from the open and stayed there throughout the day. This left the S&P 500 closing officially in bear territory. This represents a close down 20% from recent highs (January 3^rd). It was viewed as an investor reaction to the Federal Reserve Board (FRB) meeting later this week. Recent higher than expected inflation may make for more aggressive action from the FRB.

Tuesday S&P 500 0.38% | NASDAQ 0.18%

Markets struggled to find direction on Tuesday. This was likely an anticipatory day as the FRB meeting results will be out on Wednesday. In a break from recent trends, the NASDAQ outperformed the S&P 500.

Wednesday S&P 500 1.46% | NASDAQ 2.50%

The NASDAQ led the way higher on markets Wednesday. This came in response to an FRB hike of .75%, leaving the Fed Funds Rate at 1.5%. They made comment in the post meeting press conference that their year-end target is now updated from 3% to 3.5%.

Thursday S&P 500 3.25% | NASDAQ 4.08%

Markets started in the red and accelerated through the close as a pointed response to the biggest rate hike by the Federal Reserve since 1994. Rate hikes of this size are unusual, but Powell has said they will act to subdue inflation which spurred more selling. Mortgage rates continued their rise as rates responded to the Fed’s Hawkish policy.

Friday S&P 500 .22% | NASDAQ 1.43%

Markets started a rebound bid in early trading and fluctuated throughout the day following comments by Jerome Powell of the Federal Reserve. The volatility index rose to 33 from 27.8, proving the queasy feelings across broad markets. 2-year Treasury yields finished the oscillating week at 3.17% because of rate pressures and earnings outlook for growth.

Conclusion S&P 500 5.79% | NASDAQ 4.78%

Markets felt continued pressure as all indexes retreated on the week. The possibility of a “soft landing” is still on the table but it’s too early to tell. This term is used when there is more restrictive policy in place at the Central Bank and ultimately could determine whether the economy slows down too abruptly or softly. Markets have been responding accordingly. A key measure will be if the volatility index eases in coming weeks.