Quick Hits
Solid Month for Stocks
Stock returns were positive in August despite an early month sell-off.
Bonds Continue to Rise
Falling interest rates led to positive bond returns for the fourth consecutive month.
Interest Rate Cuts Ahead
Investor expectations for rate cuts rose during the month.
Continued Economic Growth
Economic updates released during the month showed signs of continued growth.
Risks to Monitor
Markets face a variety of risks as we finish the third quarter.
Positive Outlook for Markets and the Economy
Markets and the economy set for continued growth in the months ahead.
Solid Month for Stocks
August was an encouraging month for stocks, as markets ended the month in positive territory despite a brief sell-off at the start of the month. The S&P 500 gained 2.43 percent while the Dow Jones Industrial Average managed a 2.03 percent return. The technology-heavy Nasdaq Composite index lagged its peers but ended the month up 0.74 percent.
These solid results coincided with improving fundamentals. Per Bloomberg Intelligence, as of August 29 with 99 percent of companies having reported earnings, the average earnings growth rate for the S&P 500 in the second quarter was 13.97 percent. This is well above analyst estimates at the start of earnings season for an 8.34 percent increase and highlights the continued health of company fundamentals. Over the long run, fundamentals drive market performance, so the better-than-expected earnings growth is a positive development for investors.
Technical factors were supportive as well during the month. All three major U.S. indices spent the entire period well above their respective 200-day moving averages. (The 200-day moving average is a widely followed technical indicator, as sustained breaks above or below this level can signal shifting investor sentiment for an index.) The continued technical support in August was another encouraging development for investors during the month.
The story was similar for international stocks as well. The MSCI EAFE index gained 3.25 percent for the month while the MSCI Emerging Markets index was up 1.65 percent. Both of these international indices also spent the entire month well above their respective 200-day moving averages.
Bonds Continue to Rise
It was another solid month for fixed income investors, as falling interest rates led to rising bond prices. The 10-year Treasury yield fell from 4.09 percent at the start of August to 3.91 percent by month-end. The Bloomberg U.S. Aggregate Bond index was up 1.65 percent during the month.
High-yield bonds also had a positive August, as the Bloomberg U.S. Corporate High Yield index gained 1.44 percent. High-yield spreads spiked at the start of the month, hitting a 2024 high of nearly 4 percent, before falling to end the month at 3.15 percent.
Interest Rate Cuts Ahead
The falling rates in August was primarily due to rising investor expectations for interest rate cuts at the upcoming Federal Reserve meetings in September, November, and December. We entered the month with futures markets pricing in three 25 basis point interest rate cuts through the end of the year; however by month-end, these forecasts had increased to four cuts. Fed chair Jerome Powell announced at the annual Jackson Hole central bank retreat that the time has now come for lower interest rates, which was widely expected by economists and welcomed by markets.
This announcement near month-end helped drive the rising calls for rate cuts at the upcoming Fed meetings. While it’s too early to rely on cuts at the November and December meetings, a rate cut in September now appears to be locked in given the recent updates that we’ve seen on inflation and employment.
Speaking of employment, as you can see in Figure 1, the pace of hiring has slowed over the past few months, with July’s 114,000 job additions coming in well below economist estimates. Given the progress that we’ve seen in getting inflation back down near the Fed’s 2 percent target, employment data will be a key factor when the central bankers set monetary policy in the months ahead.
Figure 1: All Employees, Total Nonfarm, Change Period to Period
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