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Week in Review
Equity Markets:
The markets continued their recovery last week. The S&P 500 finished the week up 1.47% as market breadth increased. Small-caps were the top performers last week with the Russell 2000 ending the week up 3.62%1. The prospects of lower borrowing costs helped propel more economically sensitive stocks higher. The spread between growth and value was narrow last week but growth stocks still hold the advantage for the year. Year to date the Russel 1000 Growth Index is up 21.95% and the value index is up 13.59%1.
Second quarter earnings results are nearly complete with 477 of S&P 500 companies having already reported. So far, results are better than expected with 79% of companies beating earnings estimates and 60% exceeding earnings expectations2. With only a few major announcements left, many have started looking forward to third-quarter results. Analysts are expecting earnings to grow by 5.7%, which is down from the 8.7% projected on July 12.
Fixed Income Markets:
The fixed-income markets were the highlight of the week. On Wednesday, the minutes from the Federal Reserve’s Policy Meeting last month were released. The meeting minutes revealed that the majority of participants were in favor of a rate cut at their meeting in September as long as inflation reports continue on the current trajectory. The minutes were confirmed on Friday when Chairman Powell spoke at the Jackson Hole Economic Symposium. Chairman Powell said, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”3
Bonds rallied and yields fell following the announcements with the 10-year Treasury yield falling 0.08% to close at 4.81%. The yield curve steepened as shorter-term maturities rallied on the news of the policy shift. The 2-year Treasury yield fell 0.16% for the week and closed at 3.90%.
Economic:
The Conference Board’s Leading Economic Index declined by 0.6% in July. The index has shown negative readings since early 2022. But, the rate of decline has slowed significantly this year. This indicator had been flashing warning signs of a recession but more recent readings indicate economic weakness with the possibility of avoiding a recession. The recent decline in interest rates helped home sales in July. For the first time in four months, existing home sales increased month over month and came in at 1.3%. New home sales spiked 10.6% from a year ago; marking the largest increase since May 2023.
Looking Ahead
Equity Markets:
As we look through the end of the year, we still anticipate bouts of elevated volatility. Historically, we are entering a seasonally volatile period, and even more so during election years4. The S&P 500 closed last week a mere 35 points below its all-time high. The drawdown at the beginning of the month was volatile and quick but was only an 8.3% fall from the mid-July high. The rapid recovery presents a great opportunity for investors to review their desired risk appetite given the historical spike in volatility. We believe reviewing your portfolio allocations and risk exposure during the recovery is superior to making an emotional decision during a sell-off. Altering your strategic allocation during a sell-off has the potential to negatively impact your portfolio’s ability to achieve returns that align with your long-term objectives and goals.
Fixed Income Market:
The dovish tone by Chairman Powell was anticipated by the markets given the improving inflationary data. Now that policymakers have indicated a pivot, we believe it is time for investors to reevaluate their current allocations within their fixed-income allocations. Once rate cuts begin, cash alternatives, such as money markets, will see a quick reduction in yield. Identifying what percentage of their current allocation to cash and cash alternatives are earmarked for risk taking would be prudent. Reviewing opportunities to extend duration past zero to continue to reap the rewards of the relatively higher rate environment is a good exercise.
We believe the Fed will continue to be data-dependent on the path to lower rates. This could mean a slower path back to their terminal rate. We see the 10-year yield in the range of 3.25-4% through the end of the year.
Economic:
On Tuesday, we will get two more housing market updates with the S&P/Case-Shiller Home Price Index followed by the pending home sales report on Thursday. The Conference Board will release its Consumer Confidence Index on Tuesday as well. Following a strong first estimate of 2.8%, we will receive the second estimate for second-quarter GDP on Thursday. Friday will be the headline released for the week. The Fed’s preferred inflation gauge, the Personal Consumption Expenditure Price Index (PCE) will be released along with the final reading of the University of Michigan Consumer Sentiment Index.
Sources:
1)JP Morgan Asset Management
2) LSEG I/B/E/S
https://lipperalpha.refinitiv.com/wp-content/uploads/2024/08/TRPR_82221_762.pdf
3) Reuters
https://www.reuters.com/markets/key-quotes-powells-speech-feds-jackson-hole-conference-2024-08-23/
4) Fox Business
https://www.foxbusiness.com/markets/stock-market-october-perfornance-election-years
Important Disclosures:
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.
All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
Services and products offered through Krilogy® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
