August 2024 Recap – A Positive Month Underscored by Volatility

August 2024 – Market Recap

"A Positive Month Underscored by Volatility"

Ryan Potts – Portfolio Manager

August Volatility Recap

August was volatile for markets, with a sharp initial decline followed by a late-month recovery. Economic Data, International Banks, Company Earnings, and Investors' shifting expectations regarding Federal Reserve policy played a crucial role in these market swings.

The market began with a sharp decline primarily driven by two key factors: the unwinding of the Japanese Yen Carry Trade and weaker-than-expected U.S. job data.

The Bank of Japan's surprise interest rate hike forced investors to liquidate their carry trade positions, leading to a surge in selling pressure. Simultaneously, the disappointing U.S. jobs report fueled concerns about a potential recession, further exacerbating market volatility. The combined impact of these factors resulted in a severe market correction, with major indices experiencing significant declines.

The US stock market and most of the markets around the globe have been experiencing an easy run over the last 12 months. This run has seen record all-time highs and low volatility, which have made investing over the last few months feel relatively “safe.” However, volatility, like what we experienced in August, occurs quite frequently in stock market investing. As you can see below, the intra-year decline (represented by the red numbers below) on average over the last 44 years has been roughly 14.2%.

Staying the Course:

Despite the volatility, August was a good month for patient investors. By the end of the month, markets had rebounded. The losses we experienced at the beginning of the month were quickly regained, and by the end of August, the S&P 500 and Nasdaq Composite had gained 2.4% and 0.74%, respectively.

The Market's Turnaround: Anticipation of Rate Cuts

A significant catalyst for the market's recent rally has been the growing expectation of interest rate cuts by the Federal Reserve. Following Jerome Powell's speech at the Jackson Hole Economic Symposium, investors have become increasingly confident in the likelihood of a rate reduction in September.

The market is currently pricing in a 100% probability of a rate cut, with a strong expectation of a 25-basis point reduction. However, a more aggressive 50 basis point cut is also possible.

While the market has already factored in these anticipated rate cuts, it remains uncertain how much further the Fed will lower interest rates in the coming months. Many analysts predict multiple rate cuts before the end of the year, followed by a potential pause sometime in 2025.

Looking Forward:

At the beginning of the year, the market anticipated rate cuts from the Federal Reserve. However, as inflation persisted and the labor market remained robust, these expectations began diminishing. Despite the lack of rate cuts, the stock market has rallied, driven by strong corporate earnings.

Many investors believe future rate cuts will further fuel stock prices, particularly in high-growth, long-duration equities. While we acknowledge that lower rates can support the economy and earnings, we believe that any significant impact will take time to materialize. Given the market's substantial gains over the past year, we believe that the potential benefits of lower rates have already been largely priced in, especially for large-cap growth stocks.

In the long term, companies that benefit from lower interest rates, such as dividend-paying stocks, may outperform. With a market obsessed with momentum stocks - quality and inexpensive dividend payers are hiding in plain sight.

As we approach the election season, market volatility is likely to increase. Monitoring vital economic indicators, including inflation, unemployment, and consumer spending, will be essential. Assuming these remain favorable, the Fed is expected to continue easing monetary policy.

Investing is a long-term endeavor, and avoiding impulsive decisions based on short-term market fluctuations is important.

You can increase your chances of achieving financial success by staying disciplined, maintaining a long-term perspective, and aligning your investments with your financial goals.