August Recap and September Outlook

The equity markets advanced during a month when the Delta variant ravaged some states, which reinvigorated flagging vaccination rates. Positive developments, such as a bi-partisan infrastructure package, were overtaken in the news cycle by the tumultuous exit from Afghanistan. The month finished with Hurricane Ida’s one-two punch to the South and the Northeast. The big miss on August employment numbers (released September 3^rd) underscored the potential for damage that the Delta variant may hold for our still-recovering economy.

Let’s Look at Some Highlights:

The Month Opened with Good News

The services sector, which at 67% of GDP is a huge part of our economy, has lagged throughout the recovery as the impact of shutdowns, supply chain issues, and labor shortages hampered the ramping back up. The ISM Services PMI index, which tracks non-manufacturing industries, jumped to 64.1 in July, a big increase over 60.1 in June. All 17 services industries reported growth, and the ISM Services Employment index rose to 53.8, from 49.3 in June, suggesting hiring conditions were improving.

But Consumer Confidence Told a Different Story

The University of Michigan consumer sentiment index was a big downside surprise. U.S. consumer confidence fell in August to the lowest level since 2011, as fears about the Delta variant and the reopening of the economy continued to spread. The consumer sentiment index fell 13% from the July reading to 70.2. Economists surveyed by Dow Jones expected a reading of 81.3 for August.

Employment Missed Big – and Services Took the Hit

The consensus expectation for employment was that the economy would add 733,000 jobs in August, building on a very strong July number. The actual number of jobs added back was 239,000. The U.S. Bureau of Labor Statistics reported that after averaging growth of 350,000 jobs per month for the last six months, employment in leisure and hospitality was flat. This sector remains down 10% from the pre-pandemic level of February 2020.

Equity Markets

• The S&P 500 was up 2.90% in August bringing its YTD return to 20.41%
• The Dow Jones Industrial Average rose 1.22% for the month and was up 15.53% YTD
• The S&P Mid-Cap 400 increased 1.83% for the month resulting in a 19.36% YTD return
• The S&P Small Cap 600 gained 1.90% in August, raising the YTD return to 22.15%.

Source: All performance quoted from S&P Dow Jones Indices.

The idea of a “new high” is beginning to get a little jaded. The S&P 500 has posted 53 new closing highs this year. The record year to beat is 1995, with 77 new closing highs. The month of August had 22 trading days, and the market posted new closing highs on 12 of them.

Ten of the eleven S&P 500 sectors gained, with Financials recovering from a loss last month to post the best performance, and Communication Services following right behind. Real Estate is the best performing sector in the index YTD. Energy declined, but less than last month, and is still up 26.60% YTD.

Bond Markets

Fed Chairman Powell got into his thinking about inflation at the Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole. Powell is wary of getting out in front of the economy with policy decisions that take time to take hold. The caution comes from a fear that tightening in response to temporary factors could result in a situation where an “ill-timed policy move unnecessarily slows hiring and other economic activity.”

Powell also clarified the timing around tapering off the $120 billion of monthly bond purchases; he indicated a timeline more aligned to the end of the year. This is largely expected to result in rate increases, and Treasuries rebounded somewhat, but yields remain at low levels, compared to forecasts for close to 2% that we saw at the beginning of the year.

Apart from high yield, most fixed income sectors were negative for the month.

The Smart Investor

The August employment report is the first to include the damage from the Delta variant. With the surge still uncontrolled and the disruption of Hurricane Ida, it doesn’t bode well for the recovery to able to continue at the pace we’ve seen so far this year.  Companies are revisiting back-to-work timelines considering the virulence of the Delta strain, and it’s clearly have an impact on travel, vacation and resuming normal life.

In his remarks in Jackson Hole, Chairman Powell highlighted the strong July employment report as the basis for the recovering economy. With the downside surprise in August employment and the likelihood that September may also be lackluster, both the timeline for tapering and the timeline for rate increases may be lengthened. For investors, while equity markets are still booming right along, volatility is likely to increase, and bond markets may well continue to struggle. With four months left in the year, the Bloomberg Barclays U.S. Aggregate Bond Index is still in negative territory.

Reviewing portfolio assets to ensure that your income needs are met and that you can withstand potential volatility always makes sense. With the strong gains this year, it may also make sense to tune-up asset allocations, as outperformance may have pushed risk parameters out of alignment.

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The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation.

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Volatility is back. Just as many people were starting to think markets only ever move in one direction, the pendulum has swung the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good.

There are a number of tidy-sounding theories about why markets have become more volatile. Among the issues frequently splashed across newspaper front pages: global growth fears, rising interest rates, policy uncertainty, geopolitical risk, and trade issues.

In some ways, the increase in volatility in recent weeks could be just as much a reflection of the fact that volatility has been very low for some time.

So, the increase in market volatility is an expression of uncertainty. Markets do not move in one direction. If they did, there would be no return from investing in stocks and bonds. And if volatility remained low forever, there would probably be more reason to worry.

As to what happens next, no one knows for sure. That is the nature of risk. In the meantime, investors can help manage their risk by diversifying broadly across and within asset classes.

For those still anxious, here are six simple truths to help you live with volatility:

1. Don’t make presumptions

Remember that markets are unpredictable and do not always react the way the experts predict they will.

2. Someone is buying

Quitting the equity market when prices are falling is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks,” remember someone is buying them. Those people are often the long-term investors.

3. Market timing is hard

Recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was at its worst—the S&P 500 turned and put in seven consecutive months of gains totaling almost 80%. This is not to predict that a similarly vertically shaped recovery is in the cards, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

4. Markets and economies are different things

The world economy is forever changing, and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector but good for consumers. New economic forces are emerging, as global measures of poverty, education, and health improve.

5. Nothing lasts forever

Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

6. Discipline is rewarded

The market volatility is worrisome, no doubt. The feelings being generated are completely understandable and familiar to those who have seen this before. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value re-emerges, risk appetites reawaken, and for those who acknowledged their emotions without acting on them, relief replaces anxiety.

If you’d like to discuss your specific investment situation, please do not hesitate to call our office.

All expressions of opinion are subject to change without notice. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. The S&P 500 Index is not available for direct investment and does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. Contributions from Dimensional Fund Advisors LP.