August 2024 - Market Update

The Friedenthal Team

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Key Observations

S&P 500 ended the month up 2.43%. Developed International & Emerging Markets were also up 3.27% & 1.62% respectively.
Despite dropping ~6% within the first 3 August trading days, large caps recovered quickly from the selloff. Small & Midcap are still recovering, down 1.50% and 0.08% in August.
S&P Equal weight marginally outperformed the Market-cap weighted index, indicating a broader equity movement away from the Magnificent 7 stocks.
Real Estate & Healthcare were the best performing sectors, both rising more than 5% in August.
Energy & Consumer Discretionary were the only negative performing sectors
As of Aug-31, the markets are pricing in at least a 0.25% interest rate cut at the September FOMC meeting. Given the current economic data, we expect monetary policy to start loosening, but not too aggressively.
Mortgage rates hit a 52 week low, with the 30Y fixed rate dropping to 6.80% at the end of August.

Data Dashboard

Stock Market

After the initial drop, the S&P 500 gained in the last 3 weeks of August, ending the month 2.43% above the July-31 close. There was a surge in recession expectations in the first week of the month. Small cap & Mid cap are yet to recover from those fears, ending the month down 1.50% and 0.08%, respectively.

The US stock market concluded its Q2 earnings season with general trends of increased earnings growth and slowing revenue growth. The US consumer spending is resilient so far, but consumers are showing early signs of cost consciousness.

AI spending continues to be a tailwind for Technology & Semiconductors. Nvidia reported earnings after market close on Aug 26^th. Despite beating earnings expectations and raising Q3 sales guidance, the stock dropped almost 7% after hours, as the guidance fell short of investor expectations.

The VIX index (sometimes called the Fear gauge) saw a very sharp spike early in the month (crossing over 60 at one point), driven by cratering Japanese markets. A hawkish Bank of Japan meeting on July 31st, triggered an unwinding of massive Yen-carry trades. Historically, investors have taken advantage of the difference in interest rates, borrowing at very low rates in Japan to deploy in more risky global assets, e.g. US stocks. The sudden change in Japanese rate policy rattled traders globally.

The month ended with the VIX falling back under 20, indicating a much calmer market environment.

August Monthly Returns (by US Sector)

Bond Market

The US & Global Aggregate bond indexes rose 1.62% &1.44%, respectively.

The 10Y treasury yield briefly dropped below the 52-weeklows on the 5^th. Since then, it has risen slightly, ending the month at 3.85%. The US treasury yield curve became less inverted in August, with intermediate and long-term yields going up and shorter-term rates coming down. The US Aggregate Bond Index has returned 7.30% YTD, continuing to benefit from rate-cut expectations. US 2Y yields dropped 0.5% in August, dropping to almost 2-year lows. Intermediate term yields are still very low, and investors are looking for opportunities to lock-in higher yields before the Fed cuts rates.

High Yield corporate bond spreads still remain very low. Investors are only getting paid an additional 3.0% yield for taking on higher risk, compared to over 5.5% a couple of years ago. Lower yields are better for corporate borrowers, especially high yield ones, that already have an elevated cost of capital.

Swaps markets are still pricing in four 25bps rate cuts before the end of the year.

Economics

The Fed’s preferred PCE inflation gauge came in at 2.62% YoY and US GDP also grew at 3.10% YoY.

The narrative stays mixed, yet stable and the Fed’s guidance does suggest upcoming rate cuts. On August 23^rd Fed chair Jerome Powell acknowledged that inflation is coming back under control, and the job market has remained resilient.

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The unemployment data at the end of July was higher than expected, but since then reports on GDP, Inflation, manufacturing, and housing data have supported the thesis that the Fed is on track to accomplish its goal.

Mortgage rates have been dropping steadily for the last 4 months. At the end of August, 30Y Fixed rate was at 6.80%. The volume of home sales has remained low given the high-interest rate environment, yet home prices remain elevated as fewer people are willing to move and consequently give up their lower mortgage rates.

August Economic Dashboard

Tactical Trades

In our tactical stock portfolio, our largest position is currently in real estate, with IT & Industrials tied for second.

There’s no changes to our tactical ETF portfolio. We are invested in a mix of foreign equities, US sectors including real estate, and precious metals.

For our fixed income portfolio, we increased the overall duration, and presently own a combination of mortgage-backed securities and short & intermediate term bonds.

As always, please reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team