August 2024 Market Perspective
July was a mixed month for the stock market, as investors began to rotate away from megacap stocks and into areas of the market that had previously lagged. The market experienced one of the most severe rotations in years, with investors selling out of technology and A.I.-related stocks and pouring into small-cap, microcap and value stocks. This was reflected in the returns for the three major indices – the Russell 2000 (small-cap index) climbed 10.2 percent, while the Dow and S&P 500 rose 4.5 percent and 1.2 percent, respectively. This rotation away from the megacap stocks that have dominated the market for the past year and a half has been coined the “great rotation.” Fueled by investor sentiment that interest rate cuts will stimulate wider economic growth and market performance, markets are anticipating the Federal Reserve (Fed) will begin cutting rates at the conclusion of its September 17-18 meeting.
The bond market, despite fairly flat performance through the middle of the year, saw good performance as falling interest rates led to rising bond prices. The bellwether 10-year Treasury yield fell from 4.48 percent at the beginning of July to 4.09 percent by month’s end. The Bloomberg U.S. Aggregate Bond Index, the barometer of the U.S. bond market, capped a solid month by rising 2.34 percent. Bond performance was greatly influence by cooling inflation seen in the July release of the June Consumer Price Index (CPI) report, which showed inflation rose 3.0 percent from a year prior and a decline of 0.1 percent in month-over-month inflation – the first time since May 2020 that the monthly rate showed a decrease.
July also highlighted the high level of political uncertainty that we face here in the U.S. This uncertainty is likely to ramp up in the coming months, which could lead to market volatility as investors attempt to unravel the economic and market consequences of a presidency by either candidate. Although market volatility in elections years is not a new phenomenon, it is typically short-lived.
August began as July ended – on the continued hope that easing inflation, continued earnings and wage growth, and anticipation of a Fed cut. However, the release of the July nonfarm payrolls report on August 2nd put a damper on any potential rally. Not only did job growth slow more than expected in the U.S., but the unemployment rate ticked higher than expected. Nonfarm payrolls grew by 114,000 for the month, down from 179,000 in June and below the Dow Jones estimate of 185,000. The unemployment rate rose from 4.1 percent to 4.3 percent, its highest level since October 2021. This led to a market selloff to begin the month, with the fear that the economy was slowing more than expected and a recession was forthcoming. The selloff continued the next week following the announcement from the Bank of Japan that they would be raising interest rates to curb the yen’s slide against the dollar. This action led to a marked selloff globally, particularly here in the U.S. With the interest rate hike and subsequent rise in the value of the yen, global markets were thrown off as investors began unwinding yen-funded carry trades. Carry trade refers to an investing strategy where an investor borrows in a currency with a low interest rate, such as the Japanese yen, and reinvests the proceeds into higher-yielding assets somewhere else. This strategy has been a long-utilized practice across the globe, so as investors began getting out of their positions a global selloff ensued.
Mid-August saw the release of the July 2024 CPI report, which showed a continued slow decline in overall inflation. CPI rose 2.9 percent in July from a year ago – which is down from 3.0 percent in June and the lowest reading since March 2021. Core CPI, excluding volatile food and energy prices, rose 3.2 percent from a year ago and was the lowest 12-month increase since April 2021. “In short, this CPI report represents more good data and adds to the evidence supporting a [0.25 percentage point] September rate cut,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note to investors. Housing costs continue to be a sticking point keeping inflation elevated. Shelter is the largest component of CPI and therefor has an outsized effect on inflation readings. The shelter index has risen 5.1% since July 2023, accounting for more than 70% of the annual increase in “core” CPI, the Bureau of Labor Statistics stated.
The recent inflation data has given renewed hopes of a Fed rate cut in September. According to CME FedWatch (as of the writing of this article), which calculates probabilities of Fed action, is estimating a 56.5 percent probability of a 25-basis point rate cut and a 43.5 percent probability of a 50-basis point cut. A rate cutting campaign by the Fed will likely lead to broader market performance for both stocks and bonds. In 2022 as rate increased rapidly, stocks and bond fell dramatically. Conversely, when rates begin to come down, stocks and bonds will perform well, albeit for different reasons.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
