August Market Recap
The bull market took a break in August.
Following five straight months of gains for the S&P 500 and NASDAQ, equities dipped last month as inflation numbers bobbed higher, bond yields increased, and markets digested some discouraging economic trends abroad.
All three major US stock benchmarks were lower last month, though none fell more than 2.4%. Looking through a wider lens, it feels like an overdue rest following exceptionally strong year-to-date gains. When August began, the S&P 500 was working on its best 7-month start to any year since 1997.
Ten of the 11 sectors in the S&P 500 were negative last month. Energy (+1.3%) was the lone exception. Utilities (-6.7%) and Consumer Staples (-3.8%) delivered the worst performance.
Benchmark Returns: August 2023 | YTD 2023
-2.36% | +4.75%
-1.77% | +17.40%
-2.17% | +34.09%
It’s interesting that typically defensive sectors like Utilities and Consumer Staples finished at the back of the pack during an overall down-month. This would seem to imply less concern, generally, about the state of the economy. It may indicate investors are shying away from the sectors most vulnerable to still-rising interest rates.
Bond yields moved considerably higher in August. 10-year Treasuries ended the month yielding 4.09%, but rose as high as 4.36% on August 22. That eclipsed the recent high from October of last year and is the highest mark since November 2007.
Higher bond yields were inevitable, of course, given the Federal Reserve’s aggressive monetary policy over the past 18 months. But with the Fed nearing the end of its rate-hiking, it’s unclear whether bond yields are more likely to plateau or plummet from here.
The technical argument suggests yields will have difficulty rising further given the resistance provided by those November 2007 and October 2022 highs. As mentioned above, 10-year Treasury yields did fall notably in the last 10 days of August after reaching those levels.
August began with a surprising headline after credit ratings agency Fitch downgraded the US government to “AA+” (from AAA previously). Debt brinksmanship (i.e. debt ceiling uncertainty) and “a high and growing government debt burden” bear most of the blame. It’s the first downgrade of US government debt by Fitch in nearly 30 years (1994). The S&P 500 fell 1.4% in the first day of trading following the news.
The most recent CPI numbers released August 10 showed 3.2% inflation in the last 12 months. That was up from 3.0% a month earlier but still better than consensus expectations. The PCE index (the Fed’s preferred gauge) showed 3.3% year-over-year inflation.
There is plenty of debate on Wall Street whether the Fed should revise its official inflation goal (2%), which is unlikely to be reached in the near-term considering the resilience of the US economy and still-strong consumer spending. The Fed did not meet in August, but Chairman Jerome Powell commented that they will “proceed carefully” with the understanding that already implemented rate hikes have not fully filtered their way through the economy. The Fed’s next meeting and rate decision will come on September 20.
International equities suffered through an awful month. The MSCI EAFE index (Non-US Developed stocks) lost 3.9% in August and Emerging Markets sank 6.6%. Economic data revealed that European business activity fell steeply to its lowest level in three years.
Chinese manufacturing output shrank in August for the fifth consecutive month, indicating the slowdown in the world’s second-largest economy has not yet bottomed. Concern about China’s real estate sector has led to government intervention that includes efforts to boost lending and encourage investment.
US small-cap stocks, as measured by the Russell 2000 index, fell 5.2% last month after gaining north of 6% in July. Oil prices rose just under 5% with West Texas Intermediate crude topping $85 per barrel. Gold prices decreased 1.2%.
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Stock investing involves market risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. International and emerging market investing involves special risks such as currency fluctuation and political instability. These risks are often heightened for investments in emerging markets. No strategy assures success or protects against loss. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price to-book ratios and higher forecasted growth values.
Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
MSCI EAFE Index consists of the following developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
VIX-The Chicago Board Options Exchange’s CBOE Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge.