Beacon 'Pointe of View'

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The Quick Facts

U.S. large-cap equities managed to recover from a 6.1% drawdown at the start of the month to finish August with a 2.4% gain for the S&P 500.
The worst volatility surge since the pandemic occurred in early August, with the CBOE Volatility Index (“VIX”) trading as high as 66.
The Sahm rule was triggered, but the U.S. is not in a recession, according to its creator.
The U.S. economy expands at a revised 3% rate on resilient consumer spending.
The market is now pricing in a scenario where the Federal Reserve (“Fed”) is about to cut rates into a healthy economy.
All eyes are on the September 18 Federal Open Market Committee (FOMC) meeting, with the debate surrounding the magnitude of the interest rate cut.

After a tumultuous start to the month with the worst volatility surge since the pandemic, markets finished strong across asset classes. As the Yen carry-trade unwind of the beginning of August settled down, concerns over the economy declined. Thanks to macroeconomic data pointing towards a soft landing remaining more likely than a recession, U.S. large-cap equities managed to recover from a 6.1% drawdown at the start of the month to finish August with a 2.4% gain for the S&P 500, and the year-to-date total return just shy of 20%.

Investors are now focused on the September 18 Federal Open Market Committee (FOMC) meeting, with the debate surrounding whether to expect a 25 basis-point or 50 basis-point interest rate cut. Gains in equities, Treasuries and investment-grade bonds depict the market pricing in a scenario where the Fed is about to cut rates into a healthy economy. The U.S. economy grew at a slightly stronger 3.0% pace in the second quarter than initially reported, reflecting an upward revision to consumer spending.

During the Fed’s annual conference at Jackson Hole, Fed Chair Jerome Powell said, “The time has come for policy to adjust.” He added, “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.”

August Asset Class Performance

Consumer Staples (+6.0%) and Real Estate (+5.7%) led among sectors in August, while Energy (-2.1%) and Consumer Discretionary (-0.2%) were the laggards. Year-to-date, the top three performing sectors are Financials (+22.6%), Utilities (+22.4%) and Communication Services (+20.8%), while the worst three are Consumer Discretionary (+5.1%), Real Estate (+10.6%) and Energy (+10.6%).

According to statistics provided by S&P Global, the Magnificent 7 (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla), which account for 30.5% of the S&P 500’s market value, reduced the S&P 500’s total return for August by 0.75%, with only 3 of the 7 posting gains for August. Year-to-date, the 7 account for 45% of the index’s return, with Nvidia alone accounting for 23% of the S&P 500’s gain. As the dominance of the Magnificent 7 declined for the month, one major takeaway was the continued improvement of the other 493 (S&P 500 ex-the Magnificent 7) speaking to a broader equity market momentum.

Value marginally outperformed Growth, with the Russell 1000 Growth up 2.1% in August (+21.1% YTD) vs. +2.7% for the Russell 1000 Value (+15.1% YTD). Over the last three years, the total return of the Large-cap Value index has lagged the total return of the Large-cap Growth Index by 5.8%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was down 1.5% in August but remains up 10.4% year-to-date. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 3.0% in August, 0.6% ahead of the S&P 500. Over the last three years, the ESG index is up 22.2% and 7.0% behind the S&P 500 on a total return basis. Emerging markets equities underperformed in August, with a +1.6% total return. They continue to lag U.S. equity returns year-to-date (+9.5%), over the last 12 months (+15.1%), and over the last 3 years (-8.9%). The EAFE (Europe, Australasia, and the Far East) equity index outperformed in August, recovering from earlier election uncertainty. The index was up 3.3% in August and is now up 12.5% year-to-date, behind the U.S. but ahead of Emerging Market returns for equities.

The rise in the unemployment rate in July to 4.3%, announced on August 2, brought the Sahm rule to 0.53, just above its trigger. Even so, Economist Claudia Sahm, who created the rule in 2019, believes that “there is good reason to view the current rise in the unemployment rate as overstating the recessionary dynamics.” However, she also noted in an opinion piece published in August that “the risk of a recession is elevated, strengthening the case for the US Federal Reserve to cut interest rates.” Treasuries extended gains in August. The 10-year U.S. Treasury closed August at 3.90% vs. 4.40% at the end of June, 3.88% at the end of December 2023, and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury closed 34 basis points lower on the month at 3.92% vs. 4.25% at the end of 2023. The 2y x 10y yield curve inversion is almost gone with just 2 basis points left at the end of August. The U.S. Aggregate bond index was up 1.4% in August, bringing the YTD return to 3.1%. The Municipal Bond Index was up 0.8% in August and is now in the green YTD (+1.3%).

The Democratic National Convention nominated Vice President Kamala Harris as the party candidate for President and Governor of Minnesota Tim Walz for Vice President. They will oppose the Republican ticket of former president Donald Trump for President and Senator of Ohio J.D. Vance for Vice President at the November 5, 2024 election. While elections may create short-term fluctuations, it is essential to maintain a long-term perspective. Reacting impulsively to market fluctuations can lock in losses and derail investment strategy.

The VIX saw the worst volatility surge since the pandemic at the beginning of August, trading as high as 65.7. The VIX closed August at a more benign 15.0, compared to the post-GFC average of 18.5. Gold prices were up again in August (+2.3%), closing at $2,503 per ounce and up +21.3% YTD, ahead of U.S. large-cap equities. Oil futures, as measured by the WTI Crude Oil $/bbl, were down 5.6% in August to $74/ bbl. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, weakened by another 2.3% in August, bringing the year-to-date gain to just 0.4%. Both Bitcoin and Ethereum were down in August (-8.7% and -22.2%, respectively) but the crypto assets remain up 38.7% and 9.8% year-to-date, respectively.

Chart of the Month – Consumer Loan and Credit Card Delinquency Rates, %

Fed fund futures are financial contracts based on the federal funds rate, which is the interest rate at which banks lend reserves to each other overnight. These futures are traded on exchanges like the CME and are used to hedge or speculate on changes in U.S. monetary policy.

Each Fed fund futures contract corresponds to a specific calendar month and settles based on the average effective federal funds rate for that month. By looking at the prices of these contracts, one can infer the market’s expectations for future Fed fund rates. For example, if the futures price suggests a higher rate, the market believes the Fed might raise rates; if lower, a rate cut might be expected. Fed fund futures reflect the market’s expectations of future Fed policy actions.

These futures are crucial tools for managing interest rate risk and are often used by institutions to align their portfolios with anticipated Fed policy moves.

Currently, Fed fund futures imply the Fed will start cutting rates in September and reduce them by 2.0% (equivalent to eight 25 basis point cuts) by 2026.

Apollo’s Chief Economist believes that the “Fed pricing is wrong, and the market is making the same mistake it made at the beginning of the year” as he sees “still no signs of a US recession, and the US economy is doing just fine.”

Quote of the Month

“Earnings don’t move the overall market; it’s the Federal Reserve Board … focus on the central banks, and focus on the movement of liquidity … most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” – Stanley Druckenmiller

Major Asset Class Dashboard

Beacon ‘Pointe of View’ – A Market Update August 2024

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.

September 2024

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