August 2024 Market Commentary

Over the past few days, we have witnessed notable volatility in global markets. The S&P 500 fell by 2% last week, and in early trading today, it fell by another 3%. Even with the declines we’ve seen in recent days, the S&P 500 has delivered solidly positive returns year to date. Bond yields decreased across the curve, with larger declines on the shorter end of the curve.

The VIX measures the market’s estimate of future volatility and is often described as the market’s fear gauge. This morning the VIX reached levels not seen since March 2020 in the early days of COVID-19. Interestingly though, credit spreads (the difference in yield between riskier corporate bonds and safer Treasury bonds) have not widened much. The recent market movements are largely attributable to recent economic data releases and central bank policy.

The Bureau of Labor Statistics released a jobs report on Friday showing the unemployment rate at 4.3%, which remains low relative to most of history. We have seen jobless claims slowly ticking up in recent months, and the quits rate (the rate at which employees voluntarily leave their job) has been declining. To summarize, there appear to be significant downside risks in labor markets, and that is part of what is driving recent volatility.

The media recently has been talking about the Sahm rule (named after economist Claudia Sahm). The Sahm rule is one of many metrics the Federal Reserve uses to gauge how the economy is doing. The Sahm rule states that when the three-month moving average of the national unemployment rate is 0.5% or more above its low over the prior 12 months, then the economy is in the early months of a recession. The jobs report last week triggered the Sahm rule. However, there is no single indicator that tells the Fed or anyone else when the economy is in recession. As one example, many market commentators have been predicting a recession since mid-2022 when the yield curve inverted . Economic growth has remained strong over the past two years, even as the yield curve remained inverted.

It is possible that the labor market is stronger than what Friday’s jobs report indicated. Weather effects or temporary layoffs may have exaggerated some of the weakness indicated by the report. Most of the rise in the unemployment rate has been from new labor market entrants being unable to find work, as opposed to existing workers losing their jobs.

The Federal Open Market Committee met last week and as was expected by markets, the Fed decided to hold rates steady. Here were the main takeaways from Chair Jerome Powell’s press conference:

• Monetary policy looks more restrictive now than it did earlier this year.
• The recent data on inflation has been even better than last year’s more material declines because the softening has been more evenly distributed across different sectors of the economy.
• The committee debated whether to cut rates at the meeting, but there was broad support to wait until September. While Powell signaled that a rate cut could come in September, he was not definitive about it. Powell said, “I can imagine a scenario in which there would be everything from zero to several cuts, depending on the way the economy evolves.”

In terms of bright spots in the economy, corporate balance sheets are in generally good shape. The Fed is also highly likely to begin cutting rates in September (markets have priced in two rate cuts, reducing rates by 0.50%), which should help stimulate the economy. Rate cuts will be especially welcome for more rate-sensitive industries, which have struggled with higher interest rates over the past 18 months.

In light of these developments, it’s important to maintain a long-term perspective. Market corrections are normal and happen nearly every year. Short-term market fluctuations can be unsettling, but our investment approach is designed to weather such volatility. Our recommended portfolios are highly diversified and emphasize high credit quality on the bond side of the portfolio.

As always, we will continue to monitor the situation closely and share updates as needed with our clients. If you're interested in a deeper dive on our perspective on the economy, I encourage you to check out our quarterly economic outlook.

Thank you for your continued trust and partnership.