By: Andrew B. Noto
With the closing bell this afternoon, the S&P 500, Dow Jones Industrial Average, and Russell 3000 indices all ended the month in negative territory after a roaring start. Halfway through the month, it looked like we were on track for another banner month like July when we saw the major equity indices have one of their best months since 2020. As of the close on August 16th, the three previously mentioned indices were up around 4% in August, but all have fallen over 7.50% since then.
It is not all negative though as these same benchmarks are still well above their June 16th lows. In fact, both the S&P 500 and Russell 3000 have gained 7.86% and 8.56% respectively since mid-June. Even the popular bond index, the Bloomberg Aggregate Bond Index, has seen a slight gain since its June 16th low despite the recent rise in interest rates.
We have seen the yield of the 10-year Treasury climb from 2.60% at the start of the month to 3.17% at the close today. This can be viewed as either positive or negative news, depending on how you look at it. Let’s start with the negative case. Unfortunately, as bond yields increase, bond prices decline so investors have seen the value of their fixed income investments fall over the last month. The positive case is twofold. The first positive is the rising yield of the Treasury tends to lend itself to increased investor confidence. This could mean that investors are confident that other investments, most likely equities, provide a greater return potential. Secondly, this brings some yield back into the fixed income portion of investors’ portfolios. Though we’ve seen fixed income prices decline recently, the increase in yield should be accretive to the balanced investor’s portfolio from an income standpoint.
As we wrote about last Friday, all eyes are on the Federal Open Market Committee (FOMC), their September 21st meeting, and the subsequent press conference. Just as important as the FOMC meeting will be the August CPI report that will be released a week earlier on September 13th. The overarching theme of both events is the current state of inflation in the United States and whether the actions of the FOMC are doing anything to moderate inflation faster than expected. The August CPI report should shed some light on the effectiveness of the Fed’s actions and give them the data necessary to proceed accordingly a week later. The vast majority believe another 75 bps increase is in store for the Federal Funds Target Rate, but I am sure that can change if different data emerges.
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