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AUGUST MARKET REVIEW
Record-setting earnings, official FDA approval of the Pfizer vaccine and anticipation that booster shots will begin in September helped drive equity markets steadily higher in August. The S&P 500 index, a common measure for U.S. large-cap performance, reached 12 highs during the month on its way to gains of roughly 3%.
Since Memorial Day, the S&P 500 has gained more than 7%, belying the idea that equity markets take the summer off.
“Summer strength continued in August, dispelling the myth that investors ‘sell in May and go away,’” said Raymond James Chief Investment Officer Larry Adam. “Investors looked past the resurgence in COVID-19 cases, which has had only limited impacts to economic momentum so far.”
U.S. Federal Reserve officials and most economists believe recent inflation will be transitory, though production bottlenecks and other supply issues are likely to continue for a while, according to Chief Economist Scott Brown.
The Federal Reserve is expected to start reducing (“tapering”) its monthly asset purchases – currently $120 billion – later this year. However, “any increase in short-term interest rates is still a long way off,” Brown said.
Here are some other notable events and trends through August.
S&P 500 continues climb
The S&P 500 notched seven consecutive months of positive performance on its way to setting 53 record highs through the first eight months of the year. Sector rotation continues to transpire, but the S&P 500 breakout to new highs in August came on improved participation beneath the surface – a welcome sign technically for a market that had gotten fairly narrow. We continue to recommend a balanced, but pro-cyclical tilt to sector allocations.
Yield curve steepens slightly
Investor attentiveness intensified again, creating a see-saw effect with interest rates during August. For example, the 10-year Treasury yield stayed in a tight range between 1.22% and 1.36% through the month. The net result of this interim volatility was a slight steepening in the yield curve; intermediate and long-term rates were up while the short end finished pretty much where it started. Demand remains strong for shorter maturities.
Geopolitics likely to affect federal policy debate
September brings a series of deadlines for fiscal policy, including the start of the fiscal year, the bipartisan infrastructure deal, the debt limit, and the path forward on the proposed $3.5 trillion reconciliation package. There is a lot that needs to be accomplished in a short time and the potential for policy-driven volatility remains high. We continue to expect Democrats looking to deliver a domestic policy win, as they head into the 2021 and the midterm elections.
International markets produce small gains
Assisted by continued progress in the quarterly corporate earnings growth season, markets in both Europe and Asia produced small monthly gains despite heightened inflation talk. The need for tighter central bank policy was apparent in South Korea, Mexico and Brazil during recent weeks, a discussion that will deepen in many other countries over the next year.
The bottom line
We remain positive on the fundamental backdrop for the capital markets. Earnings season finished well ahead of expectations for the fifth quarter in a row, and we believe upside remains for forward estimates. Investors can expect short-term volatility as we work through debates about taxes, infrastructure and the debt ceiling, but the fundamental and technical backdrop appear supportive of equities over the intermediate term.
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