The Carry Trade Heard Around the World
U.S. Stock Market Performance
Based on the search results provided, here is a summary of the stock market performance for August 2024:
The stock market experienced significant volatility in August 2024, with a sharp correction early in the month followed by a strong recovery:
- The S&P 500 finished August up 2.28%, bringing its year-to-date return to 18.42% [5].
- The Dow Jones Industrial Average increased 1.76% for the month and was up 10.28% year-to-date [5].
- The Nasdaq Composite added 1.1% in August [4].
Key highlights:
1. Early August volatility: The market saw a near 10% correction in early August, with the CBOE Volatility Index spiking 64.90% between August 2nd and August 5th [3].
2. Strong recovery: Stocks staged an impressive recovery from the early August correction, supported by a still-expanding economy, positive earnings growth, and expectations of Fed rate cuts [6].
3. Sector performance: Leadership broadened out in August, with growth sectors lagging. There was a rotation into small-cap stocks and other interest-sensitive asset classes[6][7].
4. Earnings: With 99% of S&P 500 companies having reported, 80% exceeded analyst estimates, with index earnings growing 11.4% [6].
5. Federal Reserve: The Fed offered clear signals that rate cuts were imminent, contributing to market optimism [6].
6. International markets: Japanese stocks underperformed, with the TOPIX index falling 0.5%, while Chinese equity markets also declined [7].
Overall, despite the early volatility, August 2024 ended on a positive note for U.S. stocks, with major indices reaching or nearing record highs by month-end. The market showed resilience in the face of economic uncertainties and shifting expectations regarding Fed policy.
Citations:
[1] https://equalsmoney.com/economic-calendar/august
[2] https://mortgageelements.com/august-2024-economic-calendar/
[4] https://apnews.com/article/stock-market-dow-record-inflation-3c6d1dc550ed9960f7abbc74b8bf144b
[5] https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/
[6] https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update
[8] https://www.cnbc.com/2024/09/05/stock-market-today-live-updates.html
Bond Market Performance
Based on the search results provided, here's a summary of the bond market for August 2024:
1. Treasury Yields and Interest Rates:
- Treasury yields fell across the curve in August, with the most significant declines in the front end.
- The 10-year U.S. Treasury yield dropped from around 4.36% at the beginning of the month to 3.91% by the end [1][3].
- The 2-year Treasury yield fell by 34 basis points to 3.92% [2].
- The yield curve steepening continued, with the 2-year/10-year inversion ending the month at -2 basis points, its steepest point since July 2022[2].
2. Federal Reserve Policy:
- At the Jackson Hole economic symposium, Fed Chair Jerome Powell signaled a likely rate cut in September, citing increasing weakness in the labor market and progress on taming inflation [2][4].
- The market began pricing in expectations for interest rate cuts in 2024 and 2025[7].
3. Bond Performance:
- The bond market had a positive month, with the Bloomberg US Aggregate Bond Index gaining 2.3% [3].
- Investment-grade corporate bonds led fixed income returns in July and continued to perform well in August [3][2].
- High-yield bonds also saw gains, with spreads tightening and yields dropping to their lowest level in 26 months [2].
4. Market Dynamics:
- Declining yields and expectations of easing monetary policy catalyzed primary markets, with over $108 billion of new investment-grade deals and $18 billion of high-yield deals pricing during the month [2].
- The high-yield new issue market experienced its busiest August since 2021[2].
- Agency mortgage-backed securities (MBS) added 35 basis points of excess returns, marking the best August for the sector since 2003[2].
5. Economic Factors:
- Economic data suggested positive but slower growth, fueled by consumer spending [4].
- Inflationary trends continued to subside, but core levels remained above the Fed's target [4].
- The labor market showed signs of cooling, reflecting an improved balance between supply and demand for workers [4].
6. Outlook:
- Expectations grew for the Fed to begin lowering interest rates at upcoming meetings, with the pace and magnitude to be determined by incoming data [4].
- Some analysts expressed optimism about the bond market, with Fidelity stating it has been almost 20 years since bonds presented as attractive an opportunity as they are likely to in the second half of 2024[3].
Overall, August 2024 was a positive month for the bond market, characterized by falling yields, strong performance across various bond sectors, and growing expectations for a shift in Federal Reserve policy towards easing.
Citations:
[1] https://www.schwabassetmanagement.com/content/bond-market-update
[2] https://www.incomeresearch.com/monthly-fixed-income-market-update-august-2024/
[3] https://www.parkavenuesecurities.com/monthly-market-commentary-august-2024
[4] https://www.chandlerasset.com/insights/august-bond-market-review-2024
[6] https://www.nuveen.com/global/insights/investment-outlook/fixed-income-weekly-commentary
[8] https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update
Commentary:
If you tuned into the morning news on August 5th, 2024, you would believe it to be impossible that just 25 days later, the US Stock Indexes would be trading back near the all-time highs seen in mid-July. After the posting of disappointing US economic data, combined with the unravelling of the now infamous Yen Carry Trade, the S&P 500 and NASDAQ found themselves down 4.21% and 5.39% respectively during the early morning trading Monday August 5th. At that point with the S&P down 9.67% from its recent July high, and the NASDAQ down 15.64% from its July highs, many believed that this was the beginning of a larger market selloff. 25 days later, at the close of the last trading day in August, the S&P 500 finds itself up a whopping 10.2% from its August 5th low, just .45% away from its all-time highs.
Admittedly we were one of the many who tuned into the news on August 5th and believed that this was the beginning of that larger market sell-off. After all, it is often not the “Known” events that cause sharp market declines, it is the “Unknown”, these unexpected events shock the markets, leading to a “jump first, ask questions later” response from the market. Market volatility is normal, there is a saying that markets tend to take the stairs up but take the elevator down. The stock market has fallen by 10% during a calendar year more often than it has not. In this case, as the ‘unknown’ became ‘known’, coupled with the Feds clear intention to cut interest rates, the market was able to rebound and take the elevator back up rather than the stairs.
Conclusion:
As we look forward in the markets, the short-term signals support the idea that markets have room to move higher. With that said, we cannot ignore potential risks. As we head into the presidential election, we see 2 candidates with very different policies which could have an affect corporate profitability and earnings. The markets do not know for certain who will win the election; thus, we may see them begin to de-risk as we inch closer to the election date. Given the current levels of the markets, and in accordance with our philosophy, we value protecting the downside. In times of uncertainty, that has always been a philosophy we stand by at SBC Investment Management. It doesn’t mean that we are out of the markets, but we have reduced equity risk, especially in areas that depend on economic growth, while increasing exposure to bond allocations and managed futures, which tend to offset that risk in the equity markets. We will continue to monitor and analyze economic data as it comes in and will adjust accordingly when signals change.
Model Performance Update
Our Moderate model portfolio returned 1.24% during the Month of August and finished the month with 8.72% Year to Date (see chart below).
Changes to the model portfolio in August
- On 8/6/2024 we removed CPER (US Copper Index), COPX (Global Copper Miners), and NLR (VanEck Uranium & Nuclear ETF). Increased Exposure to AAAU (Physical Gold ETF) and SIVR (Physical Silver ETF)
- On 8/9/2024 we removed EWG (Germany ETF) from accounts as Hedgeye went short.
- On 8/13/2024 we began allocating to our target of 80% ESIIX (Eaton Vance Strategic Income) and 20% of BBBS (BondBloxx BBB Rated 1-5 YR Corp Bond ETF) to our Core Fixed Income Satellite.
- On 8/20/2024 we swapped FMF (First Trust Managed Futures) for CTA (Simplify Managed Futures) in Satellite 5. CTA has contracts only for US and Canadian commodities and rates, no equities. This ensures a low correlation to equities.
August 2024 performance with benchmark
August YTD Performance with Benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one-to-one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
DISCLAIMERS
SBC Investment Management’s Monthly and Quarterly Market Summary and Outlook is intended to communicate current economic and capital market information along with the informed perspectives of our investment professionals. All expressions of opinion are subject to change. Past performance may not be indicative of future results. There is no assurance that any of the trends discussed will continue, or that any of the forecasts will occur.
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Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended or undertaken by SBC Investment Management, LLC), or any non-investment related content, referred to directly or indirectly in this piece will be profitable, equal any corresponding indicated historical performance level(s), or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this piece serves as the receipt of, or as a substitute for, personalized investment advice from SBC Investment Management, LLC. Investment performance results published herein do not include investment advisory fees paid, or any other related account expenses. Performance results compiled solely by SBC Investment Management, LLC, have not been independently verified, and do not reflect the impact of taxes on non-qualified accounts.
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Hypothetical performance results shown in this report and on sbcinvestmentmanagement.com are backtested and do not represent the performance of any account managed by SBC Investment Management, LLC. They were achieved by means of the retroactive application of each of the previously referenced models, certain aspects of which may have been designed with the benefit of hindsight.
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