August 2024 Market Insights
BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
The S&P 500 had its second 5% pullback of the year to start the month of August, but the index rebounded to have a small gain by the middle of the month. Bond yields and mortgage rates recently hit 1-year lows. Expectations for a Fed cut in mid-September have been solidified, with the only argument being will it be 0.25% or 0.50% to start this easing cycle?
Stocks:
During Presidential election years, there has often been heightened volatility in the August to mid-October timeframe; this cycle, it started off quickly. Volatility spiked dramatically on Monday August 5th, with the S&P 500 posting a rare 3% down day. On the Friday before, the monthly jobs report showed 4.3% unemployment. While still historically low (4.4% was the best unemployment rate in 2006/07), the rate increased from 3.5% a year ago and 3.8% in March. Concerns over a slowing economy and a Fed that might be “behind the curve” quickly put markets in a risk-off mode, and many speculative trades around the world were quickly unwound. In the days since, economic data has been better than expected, be it readings of stronger growth or slower inflation.
Economy:
Inflation readings continue to improve, and recent reports have been better than expected. The latest consumer inflation readings, such as the monthly core PCE at 2.5%, continue to show improvement. The first read on Q2 GDP was better than expected at 2.8%. The ISM Services Index was better than expected as it went back into growth territory. Q2 earnings reports by S&P 500 companies went better than expected as well, showing over 10% year-over-year earnings growth and a higher-than-average earnings “beat” rate.
Bonds:
Since our last Insights, interest rates have declined to the lowest levels in over a year, but rates seem acceptable for both savers and borrowers. Yields on 2-year Treasury bonds were recently 4.1%, 5-year bonds 3.8%, and 10-year bonds 3.9%. Investment grade corporate bonds are yielding nearly 5% across all maturities. As bond yields fell, bond prices rose, increasing total returns. Recent 1-year returns on bonds in client portfolios have been much higher than the 4-5% current yields, so we expect more modest bond returns in the years ahead than what has been seen over the past year. Lastly, mortgage rates are below 6.5% for the first time in over a year.
Federal Reserve:
The Fed will start a new easing cycle by lowering rates in mid-September. This will be the first change since July of 2023. In the next month, additional economic data will help determine whether the first cut will be 0.25% or 0.50%. Ideally, the data will allow the Fed to walk a slower path of quarter point cuts and the economy will continue to grow, but at a slower pace.
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