MTC Market Insights
September 1, 2024
Episodic Volatility
Key Takeaways
- In early August, disappointing employment data triggered a market correction and a retreat in U.S. interest rates.
- By mid-month the S&P 500 Index recovered early-month losses as inflation data came in better than expected.
- During the Fed’s annual conference, Fed Chair Jerome Powell signaled that it was time for an interest rate cut.
| Indicator | Outlook | Insights |
|---|---|---|
| Economic Growth |  |
Despite the weaker than expected employment data, the outlook for U.S. economic growth remains positive supported by healthy consumer and investment spending. |
| Inflation | |
U.S. inflation trends continued to abate with July Consumer Price and Producer Price Indices coming in below consensus expectations. |
| Fed Policy |  |
The Fed broadcasted that infaltion risks have declined, while employment risks have increased, making a September rate cut highly probable, but not unexpected. |
| Stock Market | |
U.S. equities recovered in August, with continued broadening of earnings growth to support further market gains for the year. |
= Positive Indicator = Neutral Indicator  = Negative Indicator |
Global Reverberations
On August 2nd, July employment data was reported and revealed that only 114,000 jobs were added and the headline unemployment rate inched higher to 4.3%1. While the unemployment rate remains below the 20-year historical average of 5.8%2, markets interpreted this report as validation the U.S. economy has materially weakened. Treasury yields retreated and ripple effects were quickly felt overseas. The following Monday, western markets awoke to equity market declines around the world and most notably in Japan, where the Nikkei 225 Index fell over (12.39%)2. Futures markets indicated that the Fed would lower interest rates more aggressively. In contrast, the Bank of Japan was expected to raise interest rates. As a result, currency investors moved to reverse their positions, which led to a pronounced unwinding of what is known as a “carry trade”. This led to a sharp increase in the value of the yen and put downward pressure on global and U.S. equities. This event served as a reminder of the interconnectedness of global financial markets.
As the month progressed, more constructive economic data were released. U.S. business optimism improved, mortgage applications jumped, and initial jobless claims came in lower than expected2. Toward month-end the Federal Reserve hosted its annual Economic Symposium in Jackson Hole. Fed Chair Powell informed the market that “upside risks to inflation have diminished…downside risks to employment have increased"3. The additional economic data and Powell’s speech helped to inject confidence back into the market and reestablished expectations for a less restrictive and gradual shift in monetary policy. This was consistent with our previously declared, positive economic outlook.
Navigating Episodic Volatility
Over the first five trading days of August, the S&P 500 Index declined (5.83%), the NASDAQ Composite declined (7.97%), the MSCI ACWI ex-US Index declined (4.24%), and the Nikkei 225 Index declined (10.26%). Since then the S&P 500 Index has gained over +8.77% leaving it up +2.43% on the month and just below its all-time high2. The NASDAQ, MSCI ACWI ex-US, and the Nikkei were up +0.74%, up +2.63%, and down (1.09%) respectively for the month2. The U.S. market rebound was largely attributed to favorable earnings trends, gradual decline in inflation, and economic results. While international results were mixed, global markets appeared to have taken solace in the U.S. market recovery.
Episodic volatility can test investors’ resolve, but acting on short-term volatility can be detrimental to long-term returns. It can be tempting to attempt to time the market in the advance of such market declines. However, history shows that the best days in the markets have occurred during weaker market environments. Also, studies have shown that missing just a few days in the S&P 500 Index would have resulted in materially lower returns. We expect more bouts of episodic volatility this year and especially as we enter the heart of election season. We encourage investors to remain vigilant, stay true to their strategic investment plans, and avoid temptations to time the market and rather commit to time in the market.