August started hot for investors and remained positive even after the end-of-month selloff. Strong earnings were fuel for the market to climb past interest-rate, inflation, and geopolitical headwinds, culminating with the S&P 500 Index posting a 2.72% increase.
Technology and Energy Lead S&P 500 Sector Performance
Technology companies continue to post massive gains amid the AI buildout. The Tech sector makes up more than a third of the S&P 500, making strong earnings and returns in the sector a significant driver of overall index performance. For the month, the Tech sector returned 6.25%, trailing only the Energy sector, up 7.02% for the month.
Only five of the eleven S&P 500 sectors were positive in the month. But the top four had significant performance. Aside from Energy and Tech, Materials and Healthcare posted strong monthly gains of 5.97% and 4.89%, respectively.
U.S. Stock Market Performance and Investor Sentiment
Investors continue to question if the good times will continue. Other than the negative return years of 2022 and 2018, the S&P 500 has posted double-digit gains every year since 2016. The index ended August up 13.14% for the year-to-date period. This has occurred despite wars, inflation, runaway debt and deficits, rising interest rates, geopolitical headwinds, and changes in the domestic political landscape.
It has not been wise historically to bet against the U.S. economy and its ability to generate returns; strength in earnings is providing confidence to investors.
U.S. Stock Valuations and Market Concentration
We continue to remain cautious due to our concerns about valuations and concentration in large U.S. stocks. Forward earnings estimates, if realized, could make currently overvalued stocks much more reasonable. The broadening of returns is also positive, but given the current weight of technology, its impact on the returns of the overall index is difficult to mitigate.
Mid-Cap and Small-Cap U.S. Stocks
Mid-cap and small-cap U.S. companies both trailed the larger-cap index for the second month in a row, with the S&P MidCap 400 up 0.15% and the S&P SmallCap 600 Index down 0.60% for the month. Strong earnings from the larger companies, combined with concerns over the future path of interest rates, put downward pressure on these markets. Both continue to outperform the larger index for the year-to-date period, but the potential for a rate hike has cooled investor enthusiasm.
International and Emerging Market Performance
Foreign markets performed well for the month, with the S&P Developed Ex U.S. Broad Market Index (BMI) and the S&P Emerging BMI posting gains of 3.30% and 3.93%. South Korea has experienced two significant drawdowns this year but remains the top-performing market, up 94.3%, followed by Taiwan, up 76.9%, according to data from Koyfin.
Strength in foreign stock markets has been widespread, with only China, India, and Qatar posting negative returns so far this year. Given the geopolitical changes, multiple wars, and the rise in oil prices, the widespread strength is surprising.
Bond Market, Federal Reserve, and Interest Rate Outlook
Bonds did well despite differing interpretations of the message from Fed Chair Kevin Warsh. His keynote speech at Jackson Hole continued the pattern of communication that investors find difficult to interpret. Although commentators had different takes on the speech, the market decided that the tone was hawkish, and expectations for a rate hike at the September meeting increased.
Treasury Secretary Scott Bessent spooked the bond market by intervening in the Japanese currency market to support the yen. This was done to keep Japan from selling Treasury securities to buy yen, strengthening the Japanese currency but potentially increasing U.S. interest rates. It had been over 30 years since the last public intervention in the Japanese currency market by the U.S.
Just as the bond market was digesting the intervention, Sec. Bessent announced that the Treasury was going to start buying $4 billion worth of longer-dated bonds, 10- to 30-year maturities, starting in early September. Although the purchases are very minor compared to the size of the debt and deficit, bond investors reacted by selling Treasuries and pushing up rates in the days after the announcement.
Taken together, these actions point out concern from the Treasury Secretary about the rise in long-term interest rates. However, the S&P U.S. Aggregate Bond Index climbed 0.45% for the month.
Precious Metals, Gold, and Silver
Precious metals had a stellar month, returning 10.03%, based on the S&P Precious Metals Index. Despite the strong month, the index is up just 1.07% for the year. Central banks have continued purchasing gold, while the AI buildout and solar panels continue to pressure the supply of silver.
The stronger dollar and interest rates have not been favorable for metals, but given the financial position of most developed countries, owning precious metals continues to be a prudent part of a well-diversified portfolio.
Looking Ahead in the Investment Markets
As we continue through the dog days of summer, with a continued war and election season heating up, about the only thing that seems certain is the heat.
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
