Looking Back at the Markets in August and Ahead to September 2022

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August was a resumption of the earlier pullback after a surprisingly strong July. The S&P 500 lost 4.08 percent, the Dow Jones Industrial Average (DJIA) dropped 3.72 percent, and the Nasdaq Composite fell 4.53 percent. Markets resumed their downward trend for the year, bouncing, in some cases, off long-term trend lines. Internationally, developed markets fell, although emerging markets eked out a small gain.

Looking Back

Interest rates. Interest rates drove the markets in August. At the Jackson Hole central banking conference, Chairman Powell shocked markets with a speech committing the Fed to continued rate increases until inflation is under control—even if that leads to economic weakness. Markets had assumed that the Fed would pause increases in the event of a recession, but that perception changed after the speech, driving longer-term rates significantly higher.

Market pressure. In August, the U.S. Treasury 10-year yield reversed a July decline, rising from 2.6 percent at the start of the month to 3.15 percent at the end. Higher rates typically mean lower stock valuations, and this was a significant driver for the weak performance last month. The rise in rates has continued in early September, so there could be more pressure on the markets moving forward.

Slowdowns in growth. Higher rates have also started to weigh on growth. While some metrics remained strong last month, signs of a slowdown were apparent. Employment growth, although still healthy, was down from prior months. Business and consumer spending were also down, while the housing market has slowed dramatically.

Earnings. While recession worries moved away from headlines, fears about earnings remained. A slower economy typically leads to a slowdown in earnings, and analyst estimates of future earnings continued to decline in August. Investors remain cautious about the outcome, and that will likely weigh on markets going into the third-quarter earnings season.

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