The equity market run-up continued in August as liquidity continues to drive investment. The S&P gained +3.04% in the late days of summer, led by communication services/technology and financial companies. The NASDAQ gained +4.09%, and the Dow Jones Industrial Average increased by +1.50%. Bond markets saw rates rising slightly over the month, plus a slight widening of credit spreads from extremely narrow levels occurred.
Investors weighed the resurgence of Taliban power in Afghanistan and retreat of U.S. forces after 20 years, a continued regulatory clampdown in China, the uncertain impact of the Delta variant, and mixed U.S. economic and inflationary data against the House of Representatives approval of a $3.5 trillion dollar budget blueprint and the FDA’s full approval of the Pfizer vaccine. Throughout the month investors awaited the possibility of a Fed policy shift at the annual Jackson Hole Summit on August 27th.
Bonds rallied in the first few trading days of the month driven by market fear around China’s tech sector regulations and better than expected manufacturing inflation data. The “risk-off” sentiment was fleeting and markets quickly reversed in the first week of August. The service sector reported strong data, job cuts were at a historic low, and total nonfarm payroll employment rose by 943,000 jobs vs. +865,000 expected in July (along with upward revisions to prior months). Monthly inflationary numbers fell in line with expectations, unit labor costs and CPI readings remained steady and PPI came in very strong.
Fixed income returns were slightly negative for the month. The yield on the US 10-Year Treasury Note rose from 1.224% to 1.31% by month-end. Bonds saw some interesting auctions – on August 11th a 10 Year Note auction was met with strong demand (bond came in 3 basis points lower than anticipated and 77% of the buyers were indirect bidders), but the following day, the 30 Year Treasury auction had very weak results and the market retraced.
Historically, policy shifts have been signaled at the Jackson Hole Symposium, however this year it was focused on the “timing of the taper”. Ironically, FOMC comments leading up to the event were more interesting than the communication at the event. There now seems to be some dissension as to the timing and longevity of the taper program between some governors. On August 4th Vice Chairman Clarida shared some hawkish comments suggesting inflation risks are to the upside and 2023 rate hikes could be appropriate. Other FOMC members commented on the speed of tapering, explaining it is more important to determine the end of QE vs when less bond buying will start. The rhetoric kept bond market participants guessing while the continued promise of liquidity fueled equities.
Both stock and bond prices rose as Chairman Powell delivered a strong but continuous message from Chairman Powell:
- A robust defense of the FOMC’s central bank policy during the COVID era
- The current pace of employment growth is good, but it must continue to grow
- Inflation is high, but the Fed is still confident that the current position is mostly transitory
- Tapering may happen by the end of the year, but do not expect rate hikes anytime soon
Some Fed watchers noted that he seemed less confident on the inflation story and stayed on the topic for longer). We will continue to watch this closely.
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