Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
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The Quick Facts
• The S&P 500 falls 1.6% in August, its first monthly slide since February
• Smaller caps perform worse, with the Russell 2000 Index down 5.0%
• Energy maintains its spot at the top of the leaderboard and is the sole sector to post a monthly gain
• Personal Consumption Expenditures (“PCE”) inflation comes roughly as expected in July – the headline is 3.3% YoY and core 4.2% YoY
• Traders are concerned that the Federal Reserve (”Fed”) will keep interest rates higher for longer to prevent a flare-up in inflation
• Treasury 10-year yields extended their retreat after hitting an almost 16-year high of 4.3%
• U.S. government long-term debt downgraded by Fitch
Despite a strong recovery in the latter part of the month, the U.S. market rally took a breather in August, with the S&P 500 down 1.6%, as inflation concerns coupled with uncertainty around the future trajectory of rate hikes reared their head again. Smaller caps performed even worse, with the Russell 2000 Index down 5.0%. Energy maintained its spot at the top of the leaderboard and was the sole sector to post a gain (+1.6%).
The Nasdaq was down 1.5% in August but reached its highest in over four weeks after a Commerce Department report showed the Fed’s preferred inflation gauge, the PCE price index, climbed 3.3% in July on an annual basis, in line with expectations. Excluding volatile food and energy components, the core PCE price index rose 4.2% in July, year-on-year, also in line with estimates.
The market expects the Fed to stand pat at their September 20 policy meeting – the probability of a pause was at 88% on August 31, according to the CME Group’s FedWatch tool. The Fed has maintained that it is ready to keep raising interest rates to combat inflation, but its next move will be based on the latest economic data. Since 2022, the central bank has raised its main interest rate aggressively; it was raised to the highest level since 2001 in an attempt to push inflation back down to the Fed’s target of 2.0%.
August Asset Class Performance
On a total return basis, Energy was the only sector in the green in August, with a +1.6% return. Utilities and Consumer Staples were the worst-performing sectors, down -6.1% and -3.9%, respectively. Year-to-date, Technology and Communication Services remain the best-performing sectors, with +41.8% and +41.7% returns, respectively. The Utilities sector is now the clear laggard YTD with a -9.3% return. Large-cap Value stocks underperformed Large-cap Growth stocks by -1.8% in August. The Russell 1000 Growth index is now outperforming the Russell 1000 Value index by 26.3% YTD. However, over the last three years, the total return of the Large-cap Value index is ahead of Large-cap Growth by 10.0%. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was down 1.6% in August, in line with the S&P 500. Over the last three years, the ESG index is up 30.5% and -4.1% behind the S&P 500 on a total return basis.
In early August, the U.S. government’s sovereign credit rating was downgraded by one notch from AAA to AA+ by Fitch Ratings, citing rising debt at the federal, state, and local levels, and a “steady deterioration in standards of governance” over the past two decades. The downgrade, along with heavy treasury issuance and changing views on a Fed pivot, caused U.S. treasury yields to move from below 4.0% to as high as 4.3% before ending August at 4.1%. The bond market volatility caused stocks to sell off for most of the first three weeks of the month before they staged a rebound in the final week. The yield on the benchmark U.S. 10-year Treasury now stands at 4.1% compared to 3.5% at the end of March. Shorter term 2-year U.S. Treasury now yields 4.9%. The yield curve remains inverted, with the U.S. 2-year Treasuries yielding 75 basis points more than 10-year maturities as compared to a 55 basis-point inversion at the beginning of the year.
In his Jackson Hole speech, Fed Chair Powell took a middle-of-the-road stance, with plenty of takeaways for both bears and bulls. Reaffirming a data-dependent approach, Chair Powell said the Fed will continue to “proceed carefully” while assessing incoming economic data, affirming the commitment to reducing inflation to the 2.0% target level. Consumer spending increased 0.8% in July, the most in six months, as Americans bought more goods and services, and slowing monthly inflation rates cemented expectations that the Fed would keep interest rates unchanged next month. The current pace of increase in consumer spending is unlikely to be sustainable. Households are drawing down excess savings accumulated during the pandemic. Student debt repayments resume in October for millions of Americans, and higher borrowing costs could make it harder for consumers to keep using credit cards to fund purchases.
Oil futures, as measured by the WTI Crude Oil, rose 2.2% in August after gaining more than 15.0% in July. This marks the third straight month of gains for crude. WTI traded as high as $123.70 back in March 2022, a 14-year high. Gold spot prices lost 1.3% in August to close at $1,940/Oz, up 6.4% YTD. Although digital asset valuations fell during August, the month ended with a spark of optimism after the District of Columbia Circuit Court of Appeals further opened the door to potential spot Bitcoin ETF approval in the U.S. market by vacating the Securities and Exchange Commission’s denial of Grayscale’s proposal to convert Grayscale Bitcoin Trust (“GBTC”) to a spot Bitcoin ETF. Bitcoin is now up 57.3% YTD, while Ethereum is up 37.5%.
The U.S. Dollar Index (DXY) gained 1.7% in August. DXY is now flat YTD, yet down nearly 8.0% since last September’s peak. The Fed’s tightening cycle that began in March of last year helped power the U.S. dollar’s gains last year, as higher rates helped attract overseas investors. A strong dollar tends to hold back stocks and other risky investments, as S&P 500 companies generate more than a third of their revenue from outside the U.S. As expectations grow that the Fed will halt interest-rate hikes soon, market participants are wagering that the dollar could lose more steam.
Elevated interest rate volatility has been constant since the Fed began its rate-hiking cycle last year. While equity investors look to the well-known CBOE Volatility Index (“VIX”), bond investors focus on the less famous ICE BofA MOVE (“MOVE”) Index, which measures bond market volatility. The MOVE Index remains elevated at 108 compared to historical averages, which reflects the highly uncertain rate environment. The VIX closed August at historically low levels reached in June (13.6), after an intra-month spike to 17.9.
Chart of the Month – Personal Savings Rate
“Excess savings” refers to a situation where individuals, businesses, or governments are holding a larger amount of money or financial assets than they typically would under normal economic conditions. This phenomenon often occurs during times of economic uncertainty, such as recessions or financial crises, when people become more cautious with their spending and start saving more money. Several factors can contribute to excess savings: economic uncertainty, government stimulus, restricted economic activity, and changes in investment behavior.
Prior to the COVID-19 pandemic, the personal saving rate in the United States had been relatively low compared to historical standards. It often hovered around 6% to 8% of disposable personal income. This means that, on average, Americans were saving a relatively small portion of their income.
However, the COVID-19 pandemic had a significant impact on personal saving rates. In the early months of the pandemic, with widespread lockdowns, reduced spending opportunities, and government stimulus payments, the saving rate spiked to historically high levels. At its peak in April 2020, the personal saving rate reached around 33.7%, which was an unprecedented level.
These elevated saving rates were partly due to the economic uncertainty and restrictions on spending caused by the pandemic. As the economy started to recover and restrictions were lifted, the saving rate gradually declined to below pre-pandemic levels as Americans are drawing down from an estimated $2.1 trillion of excess savings.
It is estimated that these excess savings are likely to be depleted by the end of 2023. With the saving rate dropping to 3.5% last month, the lowest since November 2022, the outlook for consumer spending is less robust. The saving rate was at 4.3% in June and 4.7% in May. Immediately before the pandemic, savings rates were much higher, averaging 8.8% in 2019.
Quote of the Month
“The individual investor should act consistently as an investor and not as a speculator.” – Benjamin Graham
Major Asset Class Dashboard
Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
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