Looking Back at the Markets in August and Ahead to September 2023

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August saw modest market pullbacks across the board, as investors were nervous about risk. The U.S. indices were down by low single digits, with the Nasdaq doing the worst. International markets also pulled back—developed markets were down slightly more than U.S. markets, and emerging markets performed worst of all. Even fixed income declined, as higher interest rates drove the U.S. Aggregate Bond Index down slightly. Financial markets spent the month in a risk-off mode, hurting riskier investments like tech stocks and emerging markets at the expense of more boring ones.

Looking Back

The economy. The market performance reflected the underlying economy. While the second quarter’s economic growth came in stronger than expected, the data showed that growth is likely to slow. Further, business and consumer confidence pulled back, and inflation showed signs of ticking up again, even as job growth continued to slow. There was some good news, as income and spending growth beat expectations. But overall, the data was weak enough to increase investor concerns.

The Fed and interest rates. Despite those concerns and August’s weak market performance, markets rallied toward the end of the month, on hopes that the Fed might pause its rate increases. Rates ran up before the central bank’s Jackson Hole conference and Chair Powell’s speech but have since pulled back. Inflation is up slightly, but a deeper analysis of the data shows the trend should still be down. While growth has slowed, the economy is still growing. And that slower growth should also be good for inflation. So, while progress may be moderating, we are still moving forward.

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