August started off hot in a reversal from July’s volatility, but the gains began to fade mid-month as inflation fears gripped the market and gridlock in the Strait of Hormuz reignited the conflict in Iran. Oil prices continued to rise, which had a direct relationship with bond yields. The 30-year Treasury Bond hit multi-year highs, dampening equity markets and forcing bond prices lower. However, earnings reports continued to provide strong results and showcase the strength of many of the individual companies that constitute our equity markets. Earnings growth continues to persist through rising input prices and geopolitical tensions, providing ballast during times of unrest. Although equity markets had pulled back from all-time highs achieved at the beginning of the month, August resulted in marginal gains across major equity indices. Underpinning these gains, the fourth quarter outlook for earnings growth is strong, and the American consumer remains healthy. Consequently, focus remains on the oil prices and interest rates.
This relationship between crude and bond markets has become a significant factor this year for many investors, and it is one that is more nuanced than typical reactions of equity markets. Bonds and similar interest-bearing securities are considered fixed income, an asset class which is often misunderstood. Fixed income, by its nomenclature, is often mistaken to be void of price volatility, but this is not the case. In reality, fixed income securities have a market price that fluctuates daily in relationship to current interest rates, but, unlike equities, they have fixed interest payments and fixed maturity values. Investors are being paid to wait. In our current environment many issues are trading at a discount to their maturity value, which is the price reflected if the security is sold today, but for long-term investors who will hold until maturity, this is point-in-time price volatility that has no bearing on the ultimate value at maturity or the income received during the holding period.
Trading volume was light to begin September as investors awaited the key economic reports that surrounded Labor Day. The first of these was the BLS employment report, which showed blockbuster job growth in comparison to meager expectations. In another “good news is bad news” scenario, interest rates rose and equity markets drifted lower in anticipation of inflation reports to come. Next, were the Producer Price Index and Consumer Price Index reports. These came in roughly as expected, but, unfortunately, expectations were for warmer readings because of higher oil prices and their flow through to prices of most goods and many services. Ultimately, the culmination of this data shifted attention back to the Federal Reserve. Markets now price in a high likelihood of a quarter-point interest rate hike at the central bank’s September meeting. However, markets may take this in stride, choosing to view it as a signal that new Chief Kevin Warsh is serious about lowering inflation and providing stability to long-term interest rates.
Data sourced from Janney's “September Investment Perspectives"
