Hello all - we hope you had a nice August.
Stocks started the month on a downtrend, moving steadily lower. However, they reversed course just over halfway through the month to close with only modest losses.
For August, the Dow fell 2.3%, the S&P 500 lost 1.6%, and the Nasdaq, which has a higher concentration of tech stocks, was lower by 2.1%.
Stocks started the month on a downtrend, moving steadily lower. However, they reversed course just over halfway through the month to close with only modest losses.
For August, the Dow fell 2.3%, the S&P 500 lost 1.6%, and the Nasdaq, which has a higher concentration of tech stocks, was lower by 2.1%.
Here’s a look at how the markets moved this month:
And here is the performance of the various sectors.
Bonds were a big story this month, too. Bond yields hit their highest level since 2007 (as measured by the 10-year bond), which means the cost to borrow money is extremely high.
When bond yields rise, bond prices fall. For investors in bond index products, like bond ETF’s, that means the ETF price moved lower. Here’s a look at the price the most popular bond ETF, the Vanguard Total Bond Index:
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THE FED
You may have noticed in the stock and bond charts above how the markets moved one direction for the first half of the month and reversed course later in the month.
The reason why was news from the Fed. (The market was also very overbought early in the month and overdue for a decline, then became very oversold and due for a bounce higher. We’ll discuss this more later)
The month opened with the minutes from the Fed’s latest meeting and investors interpreted them as being tougher on inflation. That means the Fed will keep pulling back on their stimulus and raise the cost of borrowing money. As a result, investors sold stocks and bond yields rose as investors believed higher borrowing costs were coming.
However, later in the month the Fed held an “unofficial” policy meeting in Jackson Hole (It’s “unofficial” since this is really just a conference, but policy announcements have been made here in the past). Fed chief Jay Powell gave a speech which, to us, told us nothing new. However, the market interpreted it as the Fed being less likely to raise interest rates further.
Therefore, stocks rose on the news and bond yields trended lower.
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ECONOMIC DATA
Economic data also helped stocks moved higher, but not for reasons you would think.
You would think good economic news would cause stocks to rise, but that isn’t the case. BAD economic data this month actually caused stocks to move higher since it meant the Fed would be less likely to raise interest rates further. Bad news for the economy is now good news for stocks.
Getting into the bad news, a signal that the economy is cooling is the number of job openings. That number dropped sharply over the last month.
The strength of the manufacturing and service parts of our economy both lost ground over the past month, too.
On the positive side, retail sales were higher:
But durable goods (these are items with a longer life, like a phone or refrigerator) had the biggest drop in three years.
Leading economic indicators continue to move lower, too. This index combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).
This index has been lower for 16-straight months now. It has never gone this low without a recession following.
This index has been lower for 16-straight months now. It has never gone this low without a recession following.
There are many different indicators that make up that index. Below is a look at the performance of those various indexes.
The economic surveys were mixed this month. Consumer confidence turned lower:
While small business optimism ticked higher:
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INFLATION
Inflation is showing signs of cooling, or not increasing as fast, but it IS still rising. Here’s a look at the year-over-year measurement:
Keep in mind that that is only looking at inflation on an annual basis. When you look at inflation month-by-month, inflation is still rising every month It is worth noting, though, that the monthly rise has been slightly lower recently.
Inflation is also steadily rising when we exclude food and energy from the calculation (which economists call the “core” measurement).
Inflation at the business level has been volatile the last few months and took a turn higher in the latest report.
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EARNINGS
Corporate earnings results released this month also show a softening economy.
Many retail businesses reported results. These are companies like Macy’s, Target, Nike, or Dollar Tree. They are all showing weakness, which signals a weaking consumer and economy. Sales at these retailers will face even more headwinds when student loan debt repayments begin next month.
Interestingly, these retailers all report high levels of “shrink,” which we conclude is the new PC word for “theft.” This is a very real issue, though, and it will weigh on retail company stocks as their inventory disappears.
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Where does the market go from here?
Markets went from very expensive at the beginning of the month to cheap midway through the month. As it stands now, we think there may be a little more room to run to the upside, but a good entry point isn’t there anymore.
Next month tends to be a rough month for stocks. Historically speaking, September is the worst month of the year for market returns.
The market starts getting more volatile around this time of year, too.
While we think the market has a little room to the upside in the short term, we would stay on our toes here.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
