A cool breeze at the back of equities overpowered the heat that typically comes with the dog days of August. Stocks continued their upward trajectory and extended the strong rebound which began in April. Both the S&P500 (+2.7%) and NASDAQ (+4.2%) posted impressive returns, the strongest August for both indices since 2021. Interest and enthusiasm around artificial intelligence and its adjacent industries contributed meaningfully to index performance, as earnings generally outperformed expectations and forward guidance compelled investors to chase the carrot rather than feel the stick. NVidia Corp., widely considered a barometer for the larger AI sector, reported knockout results and reassured the market that capital expenditures in the space remain intact and future returns are likely to be profitable. Very profitable. Broadly, the boom in AI-related corporate earnings, which at this time is essentially unprecedented, combined with optimism around future growth prospects are all signaling to the market that the party is unlikely to end anytime soon. Investors are celebrating accordingly.
In bond land, the mood was anything but festive. While equities were cheering new all-time highs and record earnings, bonds faced a myriad of headwinds, chiefly in the form of higher yields. Throughout the month, yields came under increased pressure as renewed military action in the Strait of Hormuz reignited inflation concerns. And why not? Hot inflation has become a ubiquitous aspect of life, an ever-present reminder of the “new normal.” It has been over five years – 65 months to be precise – that the Consumer Price Index has remained above the long-term target of 2%. With the military conflict in Iran and the Strait far from resolved, and energy / commodity prices remaining stubbornly elevated, we are unlikely to see inflation come down meaningfully in the near term.
Enter the Federal Reserve. During its annual Jackson Hole Symposium, the most influential annual event in the world of monetary policy, new Fed Chair Kevin Warsh struck a hawkish tone in his keynote speech. He reaffirmed the Fed’s long-term 2% inflation target while noting that price increases have not meaningfully improved in recent months. Additionally and harkening back to his predecessor, he emphasized a data-driven approach in which economic figures such as consumer prices, producer prices, and employment numbers will dictate the future path of interest rates. This was a clear telegraph that rate increases are to be expected. The bond and prediction markets immediately repriced this development, with the odds of a September hike climbing to 66% within a day or two of the address. Yields across the curve backed up, with the 10-year treasury yield tagging 4.76% and the 30-year treasury surging to 5.34%, its highest level in decades.
Therefore, August could appropriately be characterized as a month of contrast between the heat of the equity rally and the chill of powerful bond headwinds. On the equity side, investors continue to focus on robust corporate earnings and the exciting economic future around artificial intelligence. Meanwhile, bond investors are coming to grips with the fact that the path of least resistance for yields is higher, as sticky inflation and rampant government spending are unlikely to resolve quickly. Thus, they are demanding higher returns for the risk they bear – namely that interest rates will remain higher for longer.
Asset allocators find themselves in a tricky situation. On one hand, it would be difficult to confidently say that the AI-driven equity rally has run its course. The broad indices remain a stone’s throw away from all-time highs, and the broadening out effect of which we wrote last month supports the notion that stocks have more room to run. On the other hand, with the bond market already struggling under the pressure of surging yields, it remains to be seen how long the equity markets will tolerate higher interest rates. Especially in more rate-sensitive sectors such as technology. September offers a slew of economic data to inform this thought process: the monthly employment report, producer and consumer prices, and the all-important Fed meeting on the 15th. We are remaining vigilant – monitoring the situation as it were – and we are confident that our investment philosophy of asset allocation, balance, and discipline will help portfolios navigate market conditions as they present. Hot or cold.
We hope you have a wonderful conclusion of summer. We are excited to move forward, supported as always by your ongoing faith and trust.
Sincerely,
Jason D. Edinger, CFA
Chief Investment Officer
Altara Wealth
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.