September 2024 Market Perspective
August was a choppy month for stocks. The month began with a sharp decline, with the S&P 500 sinking 6% in the first three trading days of the month. The Magnificent 7, the group of megacap stocks that have driven the market for the better part of a year and a half, dropped nearly 10% in the first week of August. The declines came on the heels of a poor July nonfarm payrolls report that showed an increase of only 114,000 jobs, which was well below the consensus estimate of 175,000 and a decline from June’s revised figure of 179,000. The unemployment rate also unexpectedly ticked up from 4.2% to 4.3%, well above the 4.1% estimated. These reports reignited investor fears of not only an economic slowdown but a recession.
The middle of the month also saw an unwinding of the Japanese yen carry trade. To combat a declining yen, the Bank of Japan raised interest rates for the second time since 2007. This led to many investors, including hedge funds and institutional investors, unwinding their yen carry trades. A carry trade is a common practice where an investor borrows money in a currency with a low interest rate (e.g., the Japanese yen) and invests in another currency or other asset that offers a higher interest rate (e.g., U.S. dollar).
However, some good news on the inflation front allowed the markets to perform well in the second half of the month. The July Consumer Price Index (CPI) report came in better-than-expected, increasing 0.2% for the month and 2.9% for the 12-month period from July 2023 to July 2024 – meeting or exceeding Dow Jones estimates of 0.2% and 3%, respectively.
Despite the turbulence seen in the beginning of the month, the markets rebounded and recovered its losses as investors continued their hopes for a soft landing from the Federal Reserve (Fed)after the positive CPI numbers. For August, the S&P 500 led the major indices by gaining 2.4%. The Dow and Nasdaq finished the month up 2.0% and 0.7%, respectively. The bond market also saw good performance, gaining 1.44% for the month and 3.07% YTD through the end of August.
The first week of September saw a spillover of volatility from the previous month as investors continued to wonder if a soft landing was, in fact, possible and when and how much the Fed would begin cutting rates. The first week of the month saw all major equity indices, domestic and foreign, decline. Despite the positive correlation between stocks and bonds observed this year, the Bloomberg U.S. Aggregate Bond Index gained the first week of September and is up 4.4% YTD (through 9/6/24).
The recent release of August’s CPI report reignited fears that the Fed will not move forward with a larger rate cut – something investors have been hoping for. Recently released inflation data for August showed the CPI dropped to its lowest level since February 2021. Month-over-month inflation rose 0.2%, which was in line with Dow Jones estimates and no change from July. The 12-month inflation rate came in at 2.5%, down 0.4% from July and below the estimate for 2.6% -the lowest level for CPI in 3½ years.
Despite the good news, the markets reacted poorly to the core CPI, which excludes volatile food and energy prices. Core CPI rose 0.3% for the month, below the 0.2% estimated, and 3.2% for the last 12 months, in line with estimates. The major driver for the rise was housing-related costs, which continue to be a sticking point in the battle against inflation. The shelter component of the CPI, which makes up approximately one-third of the index, rose 0.5% - accounting for 70% of the core CPI increase. The shelter index is up 5.2% for the years, more than any other component of the index.
Following the release of the report, CME FedWatch tools is predicting an 85% probability of a 25-basis point, or 0.25%, interest rate cut, and a 15% probability of a 50 basis-point cut. The Fed’s next meeting is scheduled for September 17-18th, where they will announce their interest rate cut decision at the conclusion on Wednesday, September 18th.
