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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Growth stocks puffed out their chest this last week, but was it all in vain?
Monday S&P 500 – | NASDAQ –
Happy Rebellion Day!
Tuesday S&P 500 0.16% | NASDAQ 1.75%
The equity markets shifted dramatically to open the week. As it did the previous Friday, markets started the day in the red and clawed their way out. Investor sentiment was signaling a more growth friendly environment. This was because commodities continued to move lower, causing less and less concern around inflation. This would potentially mean a less aggressive Federal Reserve Bank (FRB). Growth stocks led on the day as a result.
Wednesday S&P 500 0.35% | NASDAQ 0.35%
Markets gained on the day, but it wasn’t until the final hour of trading that things moved into the green. Inflation driving commodities continued to tick lower. The FRB minutes from their last meeting came out on Wednesday. Nothing shocking was contained therein. It was just an over-abundance of inflation references and an FRB willing to do anything to eliminate the inflation threat.
Thursday S&P 500 1.50% | NASDAQ 2.28%
The climb resumed on Thursday as growth led the way higher. This came even as oil rose 3.83% on the day. The climb signals persistence to inflationary pressures. Trading may have been looking ahead at the jobs report due out Friday.
Friday S&P 500 0.08% | NASDAQ 0.14%
Friday was Jobs Day. The participation rate slipped a little; private nonfarm payrolls increased by 381K and the unemployment rate held steady at 3.6%. The job adds for the month were more than 100K higher than expected, showing continued health in the jobs market. This clears the path for the FRB to continue aggressively attacking inflation. On a sad note, Former Prime Minister of Japan, Shinzó Abe, was assassinated overnight. We send our prayer to Japan and all those personally touched by his loss!
Conclusion S&P 500 1.94% | NASDAQ 4.56%
Markets gained ground on the week, led decidedly by the battered growth markets. On the surface this appears as good news. Truly, this may be a signal of mounting concerns that the 2nd quarter will reflect negative growth for the economy. This would result in the classic definition of a recession. It means that the hawkish FRB goal of 3.5% fed funds rate by year end, may prove too lofty, which has pushed growth stocks higher. Ultimately, volatility should be expected as we come to the 2nd quarter GDP reading at the end of the month.
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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.