August's market volatility, driven by tech stock concerns and economic uncertainty, has investors bracing for rate cuts and geopolitical risks ahead of election season.
The stock market was no place to escape the summer heat.
US Large Cap stocks, represented by the S&P 500, were up 3.59%* for the month, bringing the year-to-date return to 15.29%*. The market was led higher again by the usual sectors, Information Technology up 9.32%* and Communications Services up 4.80%*. Tucked between the returns of these two sectors was the Consumer Discretionary sector, up 4.89%*. Our past positioning in large cap US stocks relative to other types of equities has been beneficial to our clients, and we continue to favor large cap US equity.
Although nothing suggests a change in market momentum, there are risks worth noting.
Artificial Intelligence (AI) continues to be a dominant theme, attracting growth and investor cash flow. Even though the promise of AI is difficult to ignore, the growth in revenue and profits of companies such as Nvidia are not sustainable at current levels.
Stock prices and stock return concentrations are both at extreme highs, which means that any change in narrative or investor appetite could cause a strong reversal. AI backlash is growing with copyright issues, energy usage, and “hallucinations” all garnering attention. There are also open questions as to which AI will be the most dominant. As technology continues to develop, it is hard to envision multiple winners in the long-term. Unlike having multiple streaming channels all offering different content, at least for personal use, having multiple AI assistants seems like a stretch.
The supply of high-end semiconductor chips from Taiwan Semiconductor poses a significant risk to future growth should relations with China take an even more negative turn. Recent elections in Taiwan point to continued distance between the leadership of the two countries which could have global implications.
Over the past ten years, July has been a great month for investors.
After July, we head into the election season. Historically, the quarter before a major US election tends to be the most volatile of the year, however after the elections we tend to have the best returns of an election year. These elections offer a starkly different view on economic and geopolitical policy. While politics draw a great deal of interest and speculation, the market will adjust and move past this election just the same as every election before it.
Significant divergence between Developed Markets and Emerging Markets in June.
Surprisingly, Emerging Markets outpaced the S&P 500 rising 3.94%*, while Developed Markets were down 1.61%* for the month. Emerging markets were lifted by returns from Taiwan Semiconductor, and Samsung among other technology related companies. The lack of strong technology related companies in the major developed economies outside the US is a drag on performance for developed economies, particularly those in Europe.
Bonds enjoyed a positive month, with the Bloomberg Aggregate Index returning 0.95%*.
While not enough to bring the index into positive territory for the year, bonds may see more positive returns throughout the remainder of the year. Slowing economic data continues to pile up, which should force the Federal Reserve (Fed) to start cutting rates this year. The Fed is concerned with re-igniting inflation by lowering rates. Other countries that have started to cut rates have seen inflation bounce back, but not to the levels previously experienced, and it remains to be seen if the inflation will stick around. There is certainly the opportunity for home prices to rise if mortgage rates drop due to the pent-up demand for home buying in the US.
Gold and silver both had disappointing returns this month.
In June, gold and silver were down 0.30%* and 6.1%* respectively. Both metals have provided strong returns this year with gold up 12.9%* and silver up 23.5%*. We continue to see strong demand for gold from governments looking to diversify from the US dollar, and industrial uses for silver. A reduction in interest rates would also be a positive for returns on precious metals.
June kicked off summer with hot returns in the US stock market.
We are now in the midst of a season that typically has lower trading volumes and higher volatility. Markets will continue to react to any changes in future interest rates and inflation expectations. Meanwhile, we will continue to have a disciplined, balanced approach to protecting and increasing wealth.
* Data from Morningstar
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.
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