Market Observations: August 2024 Recap
Fed Chair Powell confirmed the Fed’s focus on the labor market at Jackson Hole.
Global equity and fixed income securities appreciated as interest rates fell during the month. The S&P 500, MSCI EAFE, and MSCI Emerging Markets indices returned 2.4%, 3.3%, and 1.6%, respectively. The U.S. 10-year Treasury yield fell by -0.18% to end the month at 3.91%. The closely followed 2yr/10yr yield spread finished the month at 0.00%, ending its historically long inversion. Both investment grade and high yield corporate bonds rose in value. The U.S. Dollar index was down -2.3% for the month.
Fed Chair Powell confirmed the Fed’s shift to prioritize the labor market during his August 23 speech at the Jackson Hole Economic Symposium. His dovish remarks discounted the possibility of further inflationary pressure while highlighting the risk of further labor market softening. The Fed Chair clearly stated, “We do not seek or welcome further cooling in labor market conditions.”
The market fully expects the cycle’s first rate cut to come at the next Fed meeting on September 18. The suspense surrounds the size of the cut, 0.25% or 0.50%. As of September 10, the market predicts a 73% chance of an initial 0.25% cut with an 88% likelihood of a cumulative reduction of at least 1.00% by year-end.
One note on the yield curve inversion streak coming to an end: While an inverted yield curve has historically preceded recessions, the normal pattern is for the yield curve to revert to being positively sloped, i.e., longer rates at higher levels than shorter rates, as the market predicts a slowing economy will require Fed rate cuts.
The following includes a summary of key points that occurred in the markets globally during the month.
US Equity Summary:
- The S&P 500 returned 2.4% for the month, and the year-to-date return ended the month at 19.5%.
- The small and mid-cap equity segments underperformed the large cap segment according to the Russell market cap indices.
- Value outperformed growth within the large cap segment while growth outperformed value across the small and mid-cap segments according to the Russell style indices.
- All S&P 500 sectors, except Energy and Consumer Discretionary, were positive for the month. Consumer Staples, Real Estate, and Healthcare were the top performing sectors. Energy, Consumer Discretionary, and Communication Services were the weakest performing sectors.
- Quarterly S&P 500 earnings growth is 11.3% (blend of reported and estimates) with 99% of companies reported. Of the reporting companies, 79% reported positive earnings surprises.
- From a factor perspective, Low Volatility, Low Volatility High Dividend, and High Dividend performed the best. High Beta, Enhanced Value, and Pure Value fared the worst.
Developed and Emerging Market Equity Summary:
- The MSCI EAFE Index returned 3.3% for the month, outperforming the MSCI EM Index, which returned 1.6%.
- Healthcare, Consumer Staples, and Communication Services were the top performing international equity sectors. Energy, Information Technology, and Materials were the weakest performing sectors.
- Healthcare, Communication Services, and Financials were the top performing emerging market equity sectors. Materials, Industrials, and Consumer Staples were the weakest performing sectors.
- Frontier markets outperformed emerging markets, as the MSCI Frontier Markets Index returned 2.0%.
Fixed Income Summary:
- • Yields on the Treasury rate curve fell during the month. Yields on the 1-month through 30-year maturities decreased by at least -0.08%.
- • The 10-year Treasury bond rose during the month as the yield ended the month at 3.91%, a -0.18%decrease from where it began.
- • The greatest drop in yields occurred with the 2-year maturity, which fell by -0.38%. The closely followed 2yr/10yr yield spread ended the month at 0.00%, ending its historically long inversion.
- • Investment grade credit generated positive returns, posting a 1.6% return as per the Bloomberg U.S. Credit Index.
- • High yield spreads tightened, despite an early-month spike, and the Bloomberg U.S. Corporate High Yield Index returned 1.6%.
- • The broad Bloomberg Global Aggregate Bond Index gained 2.4% for the month.
- • Municipal bonds returned 0.8% as per the Bloomberg Municipal Bond Index, with the high yield segment up 1.2%.
- • Non-U.S. hard currency sovereign bonds were up 3.1% as per the FTSE WGBI Non-USD.
- • The U.S. Dollar index was down -2.3% for the month.
Indices are unmanaged and presented for comparison purposes only. Please note that the returns displayed for indices do not take into account any of the costs associated with buying and selling individual securities. Individuals cannot invest directly in an index.
Bloomberg Global Aggregate Bond Index: provides a broad-based measure of the global investment-grade fixed rate debt markets. It contains three major components that comprise over 94% of the value: the U.S. Aggregate Index, the Pan-European Aggregate Index and the Asian-Pacific Aggregate Index. In addition to securities from these three benchmarks, the index also includes Global Treasury, Eurodollar, Euro-Yen, Canadian and Investment-Grade 144A index-eligible securities not already in the three regional aggregate indices.
Bloomberg Municipal TR USD: The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.
Bloomberg US Corporate High Yield TR USD: Bloomberg Barclays US Corporate High Yield TR USD
Bloomberg US Credit TR USD: The index measures the performance of investment grade corporate bonds.
Bloomberg US Treasury 1-3 Yr TR USD: The Bloomberg Barclays Capital US Treasury Bond 1-3yr term index measures the performance of short-term government bonds issued by the US Treasury.
Bloomberg US Treasury 10 Yr USD: The index measures the performance of government bonds issued by the US Treasury.
Bloomberg US Treasury 20+ Yr TR USD: The Index is market capitalization weighted and includes all of the securities that meet the Index criteria. The index includes all publicly issued, U.S. Treasury securities that have a remaining maturity greater than 20 years, are non-convertible, are denominated in U.S. dollars, are rated investment grade (Baa3 or better) by Moody’s Investors Service, are fixed rate, and have more than $150 million par outstanding. Excluded from the Index are certain special issues, such as flower bonds, targeted investor notes (TINs) and state and local government series bonds (SLGs), and coupon issues that have been stripped from assets already included.
Bloomberg US Aggregate Bond Index: The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The Index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM pass throughs), ABS, and CMBS sectors. The U.S. Aggregate Index is a component of the U.S. Universal Index in its entirety.
FTSE WGBI Non-USD: The FTSE World Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently includes sovereign debt from over 20 countries, denominated in a variety of currencies, and has more than 30 years of history available. The Non-USD index measures the performance of the markets outside of the US.
MSCI EM Index: The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 822 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country
MSCI EAFE Index: The MSCI EAFE Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises the MSCI country indices that represent developed markets outside of North America: Europe, Australasia and the Far East.
MSCI Frontier Markets Index: Captures large and mid cap representation across 29 Frontier Markets (FM) countries.
Russell 1000 Growth Index (R1000 Growth): Measures the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Index (Russell 1000): Measures the performance of the 1,000 largest companies in the Russell 3000 Index. Frank Russell Co. ranks the US common stocks from largest to smallest market capitalization at each annual reconstitution period. The Russell 1000 Index represents the vast majority of the total market capitalization of the Russell 3000 Index. It is considered to be generally representative of US Equity Large Cap performance.
Russell 1000 Value Index (R1000 Value): Measures the performance of the Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
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