Stocks Trade Lower in August as Interest Rates Rise

Monthly Client Update | September 1, 2023

Monthly Market Summary

  • The S&P 500 Index declined -1.6% in August but outperformed the Russell 2000 Index’s -5.1% decline. Energy was the only S&P 500 sector to trade higher, while Utilities and Consumer Staples led the remaining nine sectors lower.
  • Corporate investment-grade bonds produced a -1.2% total return in August, underperforming corporate high-yield bonds’ +0.2% total return.
  • International stocks underperformed U.S. stocks in August as the U.S. dollar strengthened. The MSCI EAFE Index of developed market stocks declined -3.9%, outperforming the MSCI Emerging Market Index’s -6.6% return.

 

Stocks Trade Lower in Early August but Rebound Later in the Month

The S&P 500 traded lower during the first half of August, at one point erasing all of July’s 3.3% gain. The sell-off occurred as investors worried about the potential for further interest rate hikes and increased bond issuance by the Treasury to fund government spending. Interest rates rose to levels last seen in 2007, with the 10-year Treasury yield climbing to 4.35%. This sudden rise in interest rates caught the market by surprise and weighed on stock market valuations. However, interest rates reversed a portion of their rise later in the month, with the 10-year Treasury retreating to 4.09%. The S&P 500 found its footing as yields declined and recovered to finish the month with a -1.6% decline, its first monthly loss since February of this year.

Two data points caused interest rates to decline and contributed to the stock market’s rebound into month-end. First, the number of U.S. job openings fell below 9 million for the first time since March 2021, with separate data showing that fewer employees are voluntarily quitting their jobs. The declines in job openings and quits suggest the tight labor market is improving and may help ease wage inflation. Second, consumer sentiment weakened to a 3-month low in August due to higher borrowing costs and concerns about lingering inflation. Investors interpreted the labor market data and weak consumer sentiment as an indication that the Federal Reserve is making progress in its battle against inflation and may not need to raise interest rates further.

Investors Remain Fixated on the Federal Reserve’s Next Move

The August market action is a continuation of the primary trend we have seen this year. The market remains fixated on the Fed’s next move, including how high the Fed will raise interest rates and whether it will cut interest rates in 2024. Those decisions will significantly impact the economy and stock market, and investors want to position their portfolios correctly. Each economic data point and Fed speech are analyzed for clues about interest rate policy, and as we saw in August, stocks and interest rates can change direction suddenly as new information becomes available. The market outlook has changed multiple times this year due to investors’ short-term focus on Fed policy, but this dynamic is poised to shift as the Fed concludes its rate hike cycle.

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.

Bear Market: A decline of at least 20% from the market’s high point to its low.

Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.

Correlation: A measure of the extent to which two variables are related.

Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend payments divided by its market capitalization, assuming the number of shares is constant.

Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness to foreign ownership, ease of capital movement, and efficiency of market institutions.

Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become developed markets in the future or were in the past.

Growth Factor Stocks: Growth stocks are companies expected to grow sales and earnings at a faster rate than the market average.

Large Cap Stocks: Shares of publicly traded corporations with a market capitalization of $10 billion or more.

LTM: An acronym for “Last Twelve Months” or the past one year.

NTM: An acronym for “Next Twelve Months” or the next one year.

Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including income generated in the form of interest or dividends.

Total Return: Return on a portfolio of investments including capital appreciation and income received on the portfolio.

Small Cap Stocks: Small-cap stocks are shares of companies with a market capitalization of less than $2 billion.

Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the values tend to be close to the historical average of the data set, while a high standard deviation indicates the current value is outside of the historical average range.

Value Factor Stocks: Stocks that are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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