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.
~ Your Future… Our Services… Together! ~
Your interest in our articles helps us reach more people. To show your appreciation for this post, please “like” the article on one of the links below:
FOR MORE INFORMATION:
If you would like to receive this weekly article and other timely information follow us, here.
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.
After three weeks of losses, markets were back in the green last week. Should it continue?
Monday S&P 500 -% | NASDAQ -%
Happy Labor Day!
Tuesday S&P 500 0.41% | NASDAQ 0.74%
ISM Services Data came in at 56.9, much higher than expected. Meanwhile S&P Service PMI came in at 43.7! These two surveys have deviated from each other as of late. The ISM survey is seen as broader as it covers more industries and therefore garners more market attention. The strength of the economy gives more freedom to the Federal Reserve Board (FRB) to be aggressive against inflation.
Wednesday S&P 500 1.83% | NASDAQ 2.14%
A fall in oil prices led to a Tech led rally that raised all markets. Lower oil prices signal lower future inflation pressure, which means less risk of higher rates from the FRB. While rates are rising in the short-term, markets are starting to look at the rate hike path for 2023.
Thursday S&P 500 0.66% | NASDAQ 0.60%
Two green days in a row… This has not happened for the last two weeks. The largest gains came in Financials, Healthcare, and Materials. Healthcare is a decidedly defensive play. Financials would perform well on the prospect of further rate hikes.
Friday S&P 500 1.53% | NASDAQ 2.11%
Friday saw a rise in oil prices, threats from Russia regarding fuel, and FRB comments showing commitment to rate hikes… Markets rose… At this point this may be a rally off the recent lows and less so about the daily economic data.
Conclusion S&P 500 3.65% | NASDAQ 4.14%
After three weeks of market losses, both the S&P 500 and the NASDAQ Composite gained for the holiday shortened week. Interestingly, volume was light last week as though it was a summer month. The FRB meets next week, and a 0.75% rate hike is expected. That could likely dampen some of the growth prospects in the short run.
~ Your Future… Our Services… Together! ~
Your interest in our articles helps us reach more people. To show your appreciation for this post, please “like” the article on one of the links below:
FOR MORE INFORMATION:
If you would like to receive this weekly article and other timely information follow us, here.
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.