August 2024 Monthly Market Commentary
- The S&P 500 increased 2.3% in August, outperforming the Russell 2000’s decline of 1.7%. Nine of the eleven S&P 500 sectors traded higher, led by Consumer Staples, Real Estate, Health Care, and Utilities.
- Corporate investment-grade bonds increased 1.9% as Treasury yields declined, slightly outperforming corporate high-yield’s increase of 1.5%.
- International stock performance was mixed. The MSCI EAFE developed market stock index jumped 3.3% and outperformed the S&P 500, while the MSCI Emerging Market Index lagged with an increase of 1.0%.
Markets Finish Higher in August, Recovering from Early-Month Selloff
The stock market finished August higher, recovering from an early-month selloff over fears of a weakening economy. The S&P 500 dropped over 5% in the first week after a report showed unemployment rose to 4.3% in July. Small-cap stocks underperformed as investors reduced exposure to riskier assets amid spiking volatility. However, financial markets quickly stabilized and climbed throughout the remainder of the month. By month end the S&P 500 recovered all its losses, ending the month less than 1% below its all-time high from mid-July.
Meanwhile the Nasdaq 100 Index, which includes the “AI” companies that drove the stock market higher in early 2024, lagged the broader market. In the bond market, Treasury yields fell for the second consecutive month, driven by expectations for deeper rate cuts in response to rising unemployment. Fixed Income traded higher for a fourth consecutive month as Treasury yields declined and investors rushed to lock in current fixed income yields ahead of the first expected interest rate cut in September.
Fed to Slash Interest Rates as Focus Shifts to the Labor Market
The Federal Reserve is expected to start cutting interest rates at its next meeting on September 17th. Fed Chair Jerome Powell signaled the move at last month’s Jackson Hole conference by saying, “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.” It was the Fed’s clearest policy signal since it last raised interest rates 14 months ago.
The Fed’s transition to cutting interest rates comes as its focus shifts from lowering inflation to supporting the labor market. Since the last rate hike in July 2023, inflation has dropped from to 2.9% (from 3.3%), while unemployment has risen from 4.3% (from 3.5%). The Fed is now more confident that inflation will return to its 2% target but remains concerned about the health of the US labor market. The main focus for investors should is no longer if the Fed will cut rates in 2024, but how much and how quickly the Fed will lower interest rates. Investors anticipate that the Fed will cut rates by approximately 2% by the end of 2025, but the timing and amount will depend on the economy’s path. A weaker economy would justify more rate cuts, while a stronger economy would likely lead to fewer rate cuts.
As we have noted the most important factor to all this will be the strength of the US labor market, which represents a catch-22 for the market. The stronger the labor market, the less the Fed will likely cut rates, and the less the market may react positively.
Disclosures
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A word on risk
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