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August was an encouraging month for stocks, as markets were able to end the month in positive territory despite an early-month sell-off. The Dow Jones Industrial Average ended the month at a record high, while the S&P 500 was close to its own record level. The Nasdaq Composite lagged its peers, but the technology-heavy index still managed to eke out a modest gain during the month.
Looking Back
Market volatility. Markets had a challenging start to the month, with domestic and international equities selling off in the first week of August. The sell-off was mainly due to rising investor fears about economic growth driven by restrictive central bank policy. These fears were largely laid to rest later in the month as Fed Chair Jerome Powell announced it was time for interest rate cuts. This came as a relief to investors, as bonds and stocks both rallied following Chair Powell’s comments.
Lower interest rates. Short- and long-term interest rates fell in August in anticipation of future interest rate cuts. The 10-year U.S. Treasury yield dropped from 4.09 percent at the end of July to 3.91 percent at the end of August. Short-term rates fell even further, with the two-year U.S. Treasury yield dropping from 4.29 percent to 3.91 percent. The falling interest rate environment was a boon for fixed income investors, as falling rates caused bond prices to rise for the fourth consecutive month.
Improved earnings growth. Market fundamentals showed signs of impressive growth during the month. According to Bloomberg Intelligence, as of August 29, 99 percent of companies had reported actual earnings—and the average earnings growth rate for the S&P 500 in the second quarter was 14 percent. This was well above analyst estimates for a more modest 8.3 percent increase at the start of earnings season. Fundamentals drive long-term market performance, so the better-than-expected results were another tailwind for investors during the month.
Looking Ahead
Economic slowdown. While the lower rates supported markets in August, they may also signal slowing economic growth ahead. The July employment report showed a notable slowdown in hiring during the month, and the unemployment rate rose to a two-year high. This will be an important area to monitor in the months ahead, as the health of the labor market will be a key factor for the Fed when setting interest rates at upcoming meetings.
Focusing on the Fed. Investors and economists will be paying close attention to the Fed as we approach the next FOMC meeting in mid-September. Following Chair Powell’s recent comments, futures markets have fully priced in at least one 25 basis point interest rate cut at this meeting, which would mark the first rate cut of the current interest rate cycle. Aside from the headline interest rate announcement, market participants will be focusing on Chair Powell’s post-meeting press conference to try and glean any hints on the future path of monetary policy.
The Bottom Line
On the whole, we remain in a relatively good place as we finish out the summer months and head into the fall. Market fundamentals are solid, and the headwind from high interest rates may become a tailwind in the near future.
The short-lived sell-off in early August was a reminder that markets face real risks that should be acknowledged. That said, the swift rebound during the month highlighted the resilience that markets have shown this year despite the risks they may face.
While we may encounter short-term setbacks along the way, we believe the most likely path forward for the economy and markets is further growth and appreciation.
