The S&P 500 fell 4.1% in August, giving back a portion of the summer’s strong returns. Most of the losses occurred at the end of the month, following aggressive interest rate commentary from the Federal Reserve.
Near the end of August, Federal Reserve Chairman Jay Powell delivered a speech at the Federal Reserve’s annual economic symposium. Chairman Powell emphasized the need for continued interest rate hikes to tame inflation and acknowledged that this policy would likely soften labor market conditions and cause economic pain to households and businesses. Investors were disappointed. Many were expecting more moderate commentary and an indication as to when the pace of interest rate hikes may slow or stop completely.
The sell-off in August was broad-based, with traditionally safer sectors of the market like Healthcare falling nearly as much as riskier sectors like Technology and Consumer Discretionary. Bond indices also dropped, as the Federal Reserve’s updated interest rate trajectory pushed yields upward and drove existing bond prices downward. Fixed Income on the whole lost 2.0% in August (Bloomberg Intermediate Govt./Credit Index).
Among the few winners in August were Utilities and Energy, and both showed gains for very different reasons. As one might predict, Utilities gained 0.5% as investors sought safety. On the other hand, Energy gained 2.8%, even as WTI oil prices declined 8.8% on the month. The boost came from natural gas prices, up 12% in the U.S. (Henry Hub Pricing) and surging even higher in Europe. Since early June, European natural gas prices (EU Dutch TTF) have increased more than 325%. The region, usually dependent on Russia for natural gas, has limited ability to produce their own resources. Europe is in an unenviable position heading into winter. The MSCI EAFE Index, which is comprised of approximately 66% European companies, is down 19.2% on the year.
We continue to expect stock market performance over the next few months to be driven by the pace of interest rate hikes and the upcoming mid-term elections. These events are likely to create volatility in stock and bond markets. Fortunately, the U.S. mid-term elections are two months away, and will provide clarity to investors at their conclusion. In mid-September, the U.S. Bureau of Labor Statistics will release its monthly CPI inflation report, providing the Federal Reserve an opportunity to gauge the trajectory of inflation before they announce their next interest rate hike the following week. Any signs of moderating inflation or less aggressive commentary from the Federal Reserve will be well-received by investors.
Volatility and selloffs continue to occur and are a reality for long-term investors. We remain focused on high-quality, long-term investments and believe the markets will persevere. Please do not hesitate to reach out with questions or concerns.
Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The Bloomberg U.S. Intermediate Government/Credit Bond Index tracks the performance of intermediate term U.S. government and corporate bonds. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM and CFP® in the U.S.