Market Commentary - August 2024

August 2024

Market broadens in July on raised Fed rate cut prospects

The first half of 2024 was dominated by Large-Cap Growth stocks, and the tech-heavy Nasdaq and S&P 500 set multiple all-time highs along the way. That momentum continued to mid-July, with Nasdaq and the S&P 500 closing above 18,000 and 6,500 for the first time ever. However, the June CPI 12-month inflation report encouragingly showed a decline to 3.0% after three months of sticky readings. The Fed’s favorite inflation gauge, the PCE index, also declined to 2.5% and closer to its 2.0% target.  This raised prospects for a Fed rate cut in September and sparked a surge in Small-Cap, Mid-Cap, and Value stocks representing broader market participation.

July was a near mirror image of the first half of the year, with Small-Caps, as measured by the Russell 2000 surged 10.1%, while the tech-heavy Nasdaq dipped 0.8% by month-end and the benchmark S&P 500 edged higher by 1.1%. According to JP Morgan, it was the largest one-month outperformance of the Russell 2000 versus the Nasdaq 100 in over 20 years. Mid-Caps, as measured by the S&P 400, jumped 5.7%. Both Small- and Mid-caps finished up double-digits YTD at 11.2% and 11.4% respectively. While the Dow is not a Value index, it did close above 41,000 for the first time ever and gained 4.4% in July to finish up 8.4% YTD. Value stocks outperformed Growth in July, 5.2% to -1.7% as measured by the Russell 1000 Value and Growth indexes. A broadening of the market is a healthy reflection of wider investor sentiment and not just momentum in a select few.

Overseas, developed market stocks posted solid gains as well with the benchmark MSCI EAFE index rising 2.9% in July, but still lagging US stocks YTD +6.5% versus 15.8% for the S&P 500.  Emerging Markets edged lower by 0.1%. The ECB cut rates in June despite inflation being above its 2.0% target, and the Bank of England did as well in July, which gives the Fed cover for a similar move. Meanwhile, the Bank of Japan did the opposite by raising its benchmark rate to “around 0.25%” from 0%, its highest rate since 2008.

As noted earlier, the Fed held interest rates steady, as expected, at its July FOMC meeting. The Fed noted the economy continues to expand at a solid pace, though job gains have moderated and while unemployment remains low history, it has ticked up (4.3% at the latest July reading). Chair Powell set the stage for a rate cut in September and the market has priced in as many as three by year end.  Interest rates dipped across the yield curve in July; the benchmark Bloomberg Aggregate Bond Index gained 2.5% in July to finish +1.6% YTD. The 10-year Treasury Note yield declined 0.27% to close at 4.09%.

When more parts of the market are participating and contributing to market gains, it reflects broad-based sentiment. One month doesn't make a trend but it is encouraging.  We advise investors to remain focused long-term. 

August Update

August got off to a rough start, with global stocks moving sharply to the downside just two days after the encouraging Fed FOMC meeting signaling a rate cut in September. A weaker-than-expected US jobs report raised economic growth concerns, coupled with an unwind of the Japan carry-trade (borrowing at 0% interest and investing for a higher return) following a rate hike by the Bank of Japan, unnerved investors across the globe. Market volatility spiked to levels not seen since the spring of 2023. US stocks pulled back from 6%-8% (Dow and S&P 500) to correction territory down 10%+ (Russell 2000 and Nasdaq). Interest rates declined sharply as bonds rallied, further raising Fed rate cut expectations to support the economic soft-landing narrative that has prevailed. Global markets eventually stabilized and rallied following a better-than-expected US jobless claims report that eased concerns.

Volatility remains in the near-term forecast; investor patience and discipline remain warranted. It is important to remember the pullbacks of 5%+ and corrections of 10%+ are common for the markets and part of the investment process. For a great summary of Market Volatility, Download the Capital Group Guide to Market Fluctuations.

Nonetheless, they are never fun to go through. We remain committed to our investment discipline as well as cautiously optimistic for the balance of the year, including the presidential election in November.

We continue to encourage investors:

• Remain well-diversified
• Maintain discipline and patience
• Focus on the long-term
• Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.

~Your Nelson Securities Team    

*Past Performance is No Guarantee for Future Results