August started off with a bang, as concerns over the health of the US economy and the unwinding of the Yen carry trade triggered volatile swings in the markets. Volatility remained throughout the month as economic releases highlighted improving growth and inflation, and a generally strong – with one major caveat - earnings season. A major speech by Fed Governor Powell signalled a September rate cut, finishing the month on a positive note; this news triggerd a significant increase in market volatility compared to the first seven months of the year.
The chart below shows the increase: Through July, the S&P 500 moved more than 1% up or down on 18% of the 146 trading days. The market moved that much on 41% (9 of 22) trading days in August.[1]
The caveat to the strong earnings season was Nvidia, whose earnings growth was almost unheard of - earnings and revenue were both up 150% versus the same quarter last year. The stock reacted by falling over 6%. Why? Because expectations were even higher. We’ll talk more about expectations in the outlook section.
Returns were relatively tame despite the volatility throughout the month:
Stock sector movements reflected the slowing inflation and dovish Fed:
Our Navigator framework informs our outlook.
Economy: Fiscal and Monetary stimulus have kept the economy afloat, despite negative data such as the Index of Leading Economic Indicators, which is at a level which has usually signaled recession. Credit card and auto loan delinquencies have increased to their highest levels post-GFC, indicating there is some stress at the lower end of the consumer. Consumer spending continues to exceed expectations, despite rising unemployment.
Technicals: Stocks have generally performed well after the Fed starts cutting rates; the fourth quarter is historically the strongest for stock returns. Stock breadth is strong – the NYSE advance/decline line has hit highs alongside stocks. The number of new 52-week highs is strong as well, suggesting stock momentum may continue.
Sentiment: Investor sentiment remains at bullish extremes, highlighting the potential of a decline. Companies are optimistic, with fewer mentions of recession on S&P 50 earnings calls and higher readings of small business optimism. The bond market is expressing optimism over rate cuts, pricing in a total of 6 rate cuts (1.5% in total) over the next 5 meetings, through March of 2025.
Valuation: Bond yields are higher, relative to stocks, than they have been for much of the last 20 years; both, however, became more expensive during August. Technology stocks continue to drive S&P 500 to the top decile of historical valuations. While bonds yields are attractive, the premium for owning corporate bonds is quite low.
The negative price reaction to Nvidia’s earnings highlights the risks that apply to the broad market from high stock valuations and extremely positive investor sentiment towards stocks.
The first chart to the right illustrates Federal Reserve data that show equities as a percent of investor
The second chart, from our recent webinar discussing small cap
Large cap stocks, heavily owned and trading at high valuations, are prone to increased volatility in the short term, and lower return expectations in the intermediate to long-term; valuations matter greatly for long-term returns. Small & Mid cap and international stocks, trading closer to their long-term average valuation levels, represent a compelling opportunity set for equity investors.
We are positioned accordingly to take advantage of these opportunities:
Short-term losses are a fact of investing life; a disciplined plan will allow investors to take advantage of volatility. We encourage investors to remain prepared, calm, and fully invested, during both good times and challenging markets.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
[1] Source: Bloomberg, OneAscent Investment Solutions
[2] Source: Federal Reserve Bank of St. Louis Households and Nonprofit Organizations; Directly and Indirectly Held Corporate Equities as a Percentage of Financial Assets; Assets, Level (BOGZ1FL153064486Q) | FRED | St. Louis Fed (stlouisfed.org)
[3] Source: Bloomberg, OneAscent Investment Solutions – Data series includes: S&P 500 (S&P 500 index of large cap stocks), MSCI ACWI Ex-US (Morgan Stanley All Country World Ex USA index of non-US stocks), S&P 600 (S&P 600 index of small cap stocks)
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