Summary
While August is often a month where seasoned investors expect some surprises, the last four weeks brought more than its fair share of market turmoil. Given the length of the continued positive run for the S&P 500 Index, perhaps it wasn’t so surprising that a correction was on the cards. What made this cycle different though, was that the strength of the index was dominated by 7 or more stocks, making it far from clear what would happen to the other 493 stocks in the index.
From the perspective of the Blue Chip Portfolio, the 5.0% performance in August was surprisingly robust given how hard the sell-off had been during the first few days of the month (see below). As the market became more confident that a hard landing might be avoided, many of the stocks in the portfolio lived up to their name. Leading the pack were Walmart, Netflix & Nike with total returns for the month of 12.8%, 11.6% and 11.3%, respectively. Indeed, these were not the only stocks that performed well, Meta, T-Mobile, Coca-Cola, Costco and Berkshire Hathaway all returned more than 8%.
For a second month in a row the ‘Magnificent 7’ underperformed the market, with Amazon, returning -4.5%, and Alphabet, -4.6%. These were the worst performers across all of the holdings. As the Fed finally delivers a rate cut in September, we expect a continuation of the broad trend that is seeing a far less dominant tech sector.
Early August: Market Turmoil
• US Economic Slowdown Fears: August began with concerns over a potential US economic slowdown, spurred by a weaker-than-expected jobs report on August 2. Nonfarm payrolls increased by only +114k in July, well below the +175k consensus, and the unemployment rate rose to 4.3%.
• Impact of US Jobs Report: The jobs report, combined with previous weak data, suggested a possible recession as per the Sahm rule, which tracks unemployment trends. This led to increased expectations for Fed rate cuts and contributed to dollar depreciation.
• Bank of Japan’s Rate Hike: A recent rate hike by the Bank of Japan on July 31 added pressure, strengthening the yen and affecting the yen carry trade. This strategy, where investors borrow in yen to invest in higher-yielding currencies, faced challenges as interest rate differentials between Japan and the US were reassessed.
• Global Market Repercussions: The turmoil hit Japanese markets hard on August 5, with the TOPIX index dropping by -12.2% and the TOPIX Banks index by -17.3%. This panic spread globally, with the VIX index spiking to its highest level since March 2020, and the S&P 500 dropping by -3.0%.
Mid to Late August: Market Stabilization
Positive US Economic Data: Market sentiment began to improve after August 5, aided by better-than-expected US data, including lower weekly jobless claims and strong retail sales for July.
Bank of Japan’s Reassurance: Remarks from BoJ Deputy Governor Uchida on maintaining stable interest rates further calmed the markets.
Fed Chair Powell’s Dovish Message: At Jackson Hole, Fed Chair Powell signalled potential rate cuts, reinforcing market expectations. The dovish tone was supported by falling core inflation (+3.2%), the lowest since April 2021, solidifying the belief that the Fed would cut rates in September.
End of August: Market Recovery
Equity Gains: By the end of the month, markets had largely recovered from the early turmoil. The S&P 500 gained +2.4%, marking its fourth consecutive monthly rise. Europe’s STOXX 600 also rose by +1.6%, while Japan’s Nikkei underperformed slightly, down -1.1%. Emerging markets followed the positive trend, with the MSCI EM Index up by +1.6%.
Overall, despite a rocky start driven by fears of a US economic slowdown and global market volatility, August ended on a more positive note with recovering equities and stabilized market conditions.