Market Memo | August 2024

Early Market Volatility Leaves Investors Unsettled Amid Economic Uncertainty

The season of volatility arrived early this year. Stock market volatility in the fall is expected, as is election season volatility. The rollercoaster that equity markets went on in August was a bit more than expected.

The S&P 500 extended its winning streak in August, up 2.43% for the month, but the moves up and down had even the most seasoned investors scratching their heads, if not holding their stomachs. The market fell significantly to start the month as concerns around growth, stretched valuation, and an unwinding of the Japanese Yen roiled global markets.

Although the stock market recovered through the month of August, market jitters were on full display. Led by the data dependence of the Federal Reserve (Fed), investors continue to scour every data point to decipher what each may mean for the future path of interest rates and economic growth. When employment gains were estimated to be revised down by 818,000 jobs in the first part of the year, investors were concerned about growth, yet excited about the prospect of rate cuts. Towards the end of the month, revisions in GDP growth from earlier in the year provided confidence that growth was not dropping significantly.

The Shift from Inflation Concerns to Growth Concerns Impacts Tech Stock Valuations

In August, the switch from inflation concerns to growth concerns became evident. Nvidia’s stock performance after their most recent earnings announcement provided some insight into investor sentiment. Even though Nvidia beat revenue and earnings expectations, it didn’t beat by as much as it has been in recent quarters, causing the stock to drop. We have been concerned about the overstretched valuations, particularly for technology companies, as the growth rate of the past few years seems unsustainable.

Large-Cap Stocks Lead Gains as Rate Cuts Loom, Meanwhile Small-Cap Stocks Struggle

Volatility is likely to continue in the next few months. September and October have historically been tough months for investors with elections adding to the uncertainty. One encouraging sign is that with rate cuts on the horizon, stock market returns are broadening out with Consumer Staples, Real Estate, Health Care, Utilities, and Financials sectors leading returns for the month.

The broadening market in large-capitalization stocks did not translate into gains for the smaller company stocks with the Russell 2000 index dropping 1.49% for the month. The performance of smaller company stock continues to be choppy. Caught between the benefits of rate cuts and the concerns about slowing growth, positive momentum has been difficult to find. Despite the up and down returns from month to month, the year-to-date return of 10.39% has rewarded investors.

Developed Markets Rise Despite Japanese Market Volatility and Interest Rate Uncertainty

Developed Markets outside the US experienced a strong month with the MSCI EAFE index returning 3.25%, after shrugging off turmoil in Japanese markets. The Nikkei Index, the main index in Japan, shed 12% in one day, the worst one day drop since 1987. The fall was prompted by an unexpected increase in interest rates. The index rebounded 10% the next day, fueled by speculation that the Bank of Japan (BoJ) would reverse course on future rate hikes.

As the market anticipated, BoJ Deputy Governor Shinichi Uchida said that market instability would be a factor into any potential increases, indicating that future interest rate increases were off the table. However, by the end of the month, BoJ Governor Kazuo Ueda was back to hinting at possible future rate increases.

For now, the most important exchange rate in the world is the US Dollar to Japanese Yen. If the Yen stays around 145 to the dollar, further hikes are unlikely, but a drop back down to the 160 level would likely prompt further hikes. Investors will be watching the exchange rate, Japanese inflation, and the BoJ for any signs of further tightening.

Bond Market Rises as Fed Signals Imminent Rate Cuts

Bonds enjoyed a positive month, as rates fell due to Fed Chairman, Jerome Powell, noting a shift in monetary policy during the month. The Bloomberg US Aggregate Bond index returned 1.44% for the month, bringing the year-to-date return to 3.07%. As concerns around inflation recede, concerns about the labor market increase.

The Fed has signaled that interest rate decreases are going to begin in September. Now, investors are wondering how big the rate cuts will be and how fast the cuts will come. The market speculation over the last two years on the timing and size of rate cuts has been incorrect on several occasions, so the guessing game will continue until the Fed provides clarity. Borrowing rates and yields on money market funds will move down, which may provide fuel for both the real economy and the stock market as investors start looking for places to move cash in a lower yielding environment.

Geopolitical Instability Boosts Demand for Precious Metals

Given the unpredictability of geopolitical events, such as the war in Ukraine, which has now spilled into Russia; the war against Hamas, which threatens to expand into Lebanon and Iran at any point; unrest in Libya and Venezuela; and the continued tension with China, having precious metals in portfolios has been a positive for investors this year. Gold should continue to be in demand as governments and citizens around the globe stock up.

US Elections Poised to Shape Policy Landscape with Significant Impact on Investors

Elections will continue to take center stage over the next few months. In the US, the difference between the two presidential candidates’ platforms is significant. Taxes, tariffs, trade, and regulations are all areas with almost exactly opposite approaches. Given the passion on both sides of the aisle, voter turnout is likely to be high. It seems that it will be hard for either side to have a large majority in both chambers of Congress, which is necessary to make significant changes.

As we have no extra insight to the election outcome, we will continue to be balanced in our approach and aware of the potential outcomes and the ramifications for investors.

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.