While the historically challenging month of September (average decline for S&P 500 of -1.2% since 1926) started on the wrong foot (down -4.25%), the trend turned quickly enabling stocks (and bonds) to post another winning month. The intra-day graph below of the S&P 500 (red line, left axis) and long term U.S. bonds (white line, right axis) highlights their flip-flopping correlation, from negative to positive to negative. After the fourth trading day of the month, several items catalyzed the change in investor sentiment.
While several variables drove markets down then up during August, the seminal event was the more dovish than expected interest rate guidance provided by Fed Chair Powell at Jackson Hole (JH) on August 23rd. Making it clear the Fed intends to initiate rate cuts on September 18th, Powell enunciated the FOMC is now focused on the employment side of their dual mandate. His language implied the Fed will now be proactive in its attempt to prevent further weakness in the labour market. This was an important pivot in the Fed’s messaging and directionally supportive of a soft-landing economic environment.
Interest rates have fallen off a cliff since hitting their recent peak on July 1st, with the yields on U.S. 2s and 10s falling 90 and 70 basis points respectively through last Friday’s close. Weaker growth, softer pricing data and rate-cutting supportive Fed-speak kickstarted the bond rally from which stocks took their cue. Then June’s U.S. CPI print hit on July 11th, triggering a greater than five standard deviation move in the relative strength of the Russell 2000 (small cap index) versus the NASDAQ 100, the largest de-rating since the bursting of the tech bubble in 2000. Hence, the S&P 500 gave back most of its month-to-date gains, finishing with a total return of 1.2%, while the Russell returned +10.2% and Canada’s S&P TSX split the difference, tabling a total return of 5.9%. Likewise, each of our two funds once again generated positive net returns.
Post the strong bounce back of equities during May, the combination of deteriorating market breadth and weakening economic statistics in June suggest stocks may enter a choppier period during the summer. Regardless as to whether that implies sideways or negative price performance, strong messaging that the Fed put remains in place, plus the expectation of one last barnburner quarter of earnings from mega cap tech should prevent stocks from experiencing a significant downdraft in the near term.