Highlights:
The S&P 500 Index rose 2.4% in August, bringing its year-to-date return to 19.5%, with broad stock returns outperforming the leading “Magnificent 7” stocks.
The Federal Reserve indicated a shift towards lower interest rates starting in September, with a new focus on employment rather than inflation.
Despite positive stock returns and market broadening, there is skepticism about long-term stability due to mixed economic signals and concerns over the labor market.
Americans with a stake in the stock market were once again rewarded in August, with the S&P 500 Index rising 2.4% for a year-to-date return of 19.5%. Bond investors were also pleased as medium and long-term interest rates dropped. Unlike much of the trailing year, stock returns were broad, outperforming results for the market-leading “Magnificent 7” stocks. These market returns were certainly a key factor behind consumer confidence ticking upward in August. Another positive for stocks was the dovish rumblings from the Federal Reserve’s Jackson Hole meeting in late August, where Fed Chairman Jerome Powell basically announced a pivot to lower rates beginning in September as he described the Board’s focus shifting from controlling inflation to concern over softening employment numbers.
While the positive stock returns, especially the broadening of the market, were welcome turns, we couldn’t help but feel skepticism as the major stock indices toyed with new highs. A hint of this skepticism was seen in The Conference Board’s consumer confidence surveys, where optimism was tinged with concern over the labor market. As we’ve noted in the past, the resilience of the economy in the face of the Fed’s record-setting rate increases has been largely a function of a strong consumer. Early in the tightening cycle, fiscal stimulus and Covid checks bolstered this strength. Lately, it’s been fueled by rising credit card debt and the wealth effect of the stock market for higher net worth households, with the Wall Street Journal recently reporting on the record number of 401(k) millionaires. This has helped to hide the damage the trailing inflationary period has wrought on American households with below-median incomes.
The surprising presidential candidate switch in August can serve as a harbinger of how quickly political and, by extension, economic situations can shift. The futures markets predict a 2% drop in Fed Rates by mid-2025, which, if realized, could be a real boost for future stock returns. However, in the past, such precipitous dips have only occurred in the midst of recessions. All around us are signs of economic slowdown as manufacturing measures for both demand and output dropped in August, the Labor Department revised trailing job growth down by 818,000, discount retailers reported sales and earnings declines, and even the hype over AI showed some slackening.
While monthly results do not always portend long-term trends, they can suggest shifts. In August, the long-leading Technology and Communication Services Sectors trailed the overall market while the more defensive Healthcare and Consumer Staples outperformed. The prospect of lower bond yields helped bolster the Utilities and Real Estate Sectors. These shifting fortunes highlighted our belief that the prospect of a more challenging economic period ahead doesn’t require a sharp shift in asset allocation. Instead, it highlights the importance of the constitution of that equity allocation. Here, we seek to continue to build diversification through investments in solid businesses that are reasonably valued and well-situated for success through the inevitable ups and downs of a modern economy.