The start of August was bookended by a rate hike by the Bank of Japan on July 31st and a surprisingly weak nonfarm payroll report on August 2nd. Japanese equities sharply declined when the Nikkei re-opened on August 5th and the Japanese yen rallied as the carry trade was unwound. Volatility spiked across the globe and U.S. equity markets were weak during the first full week of the month.
Markets calmed, and by the end of the month, equities delivered positive performance. However, growth concerns remained and rates moved lower following Fed Chair Jerome Powell’s dovish remarks at the Jackson Hole Symposium. This led to positive performance from fixed income and interest rate-sensitive sectors like real estate. However, global growth concerns did put downward pressure on energy investments.
Domestic equity markets continued their run, registering a fourth consecutive month of gains and nine out of 10 months of positive performance.
The S&P 500 returned 2.4%, while the broader Russell 3000 Index advanced 2.2%. Large and mid cap stocks led the market, with the Russell 1000 Index gaining 2.4%. After a very strong July, small cap stocks pulled back, with the Russell 2000 Index posting a 1.5% drawdown. Value stocks modestly outperformed their growth counterparts, with the Russell 3000 Value Index gaining 2.4% vs. 1.9% for Russell 3000 Growth.
In a reversal from July, where the market environment was risk-on, defensive sectors led the way in August. Consumer staples (+5.5%) was the best performing sector, followed closely by real estate (+5.3%) and utilities (+4.4%). Healthcare (+4.9%) was another standout, lifted by strong earnings from drug maker Eli Lilly (+19.5%). Commodity-oriented segments lagged for the month, with energy (−2.4%) finishing as the worst performing sector. Consumer discretionary (−0.8%) was the only other sector to post a drawdown, dragged down by blue chips Amazon (−4.5%) and Tesla (−7.7%).
The volatility in the U.S. that started the month bled overseas. Once the dust settled, however, both developed non-U.S. (+3.3%) and emerging markets (+1.6%) ended August in positive territory. Japan garnered global attention, with investors spooked over U.S. economic data and the yen carry trade unwinding following the Bank of Japan (BoJ) rate hike. The Nikkei 225 fell 12.4% on August 5th, its worst day since 1987; the Nikkei would briefly enter a bear market, down over 20% from the record high one month prior.
As August progressed, the yen stabilized and the Nikkei recovered, finishing August down just 1.1%. When factoring in currency movements, U.S.-based investors experienced a positive return (+0.5%) from Japan. With Japan edging out a gain, all developed countries registered a positive return in USD terms.
Emerging markets were muted relative to their developed counterparts. Performance dispersion by country was wide. China (+1.0%) continued to grind along slowly. While Beijing’s efforts to boost growth have led to pockets of improvement, particularly in manufacturing, the country’s economic outlook remains weaker than expected.
Brazil (+6.7%) was among the top performing countries, benefiting from stronger than expected GDP growth. Taiwan (+3.4%) continued its surge on the back of strong chip demand but pulled back toward month-end after another quarter of strong earnings from NVIDIA raised questions around the company’s pace of growth. This change in sentiment dragged Asian chipmakers broadly and pushed South Korea (−2.2%) into negative territory. Elsewhere, political uncertainty weighed on Mexico (-5.3%) where President Andres Manuel Lopez Obrador is threatening to make radical changes to the constitution before he leaves office on October 1st.
August began in dramatic fashion as risk assets sold off and the VIX soared in response to a weaker than expected July jobs report. On a positive note, fixed income served as a safe haven. Yields rallied sharply across the curve, as traders doubled down on September rate cut expectations. Yields stabilized in the weeks that followed, and the attention eventually shifted to Fed Chair Powell’s Jackson Hole speech for clues on monetary policy. While the speech provided little clarity on the magnitude or pace of cuts, it all but solidified a September cut, sparking another big rally in yields during the month.
The yield curve underwent a bullish steepening in August. The 2-year yield fell by 34 bps and the 10-year yield declined 13 bps, which caused the 2s10s spread to steepen from −21 bps to −1 bps. Consequently, as yields fell, long duration fixed income securities outperformed. Conversely, shorter duration fixed income securities lagged. Long Treasuries gained 2% during the month, whereas 5-10 year treasuries and 1-3 year treasuries returned 1.3% and 0.9%, respectively.
Spreads followed a different trajectory, initially widening in response to the soft jobs report before narrowing by month-end. Overall, spreads for most sectors remained relatively unchanged month-over-month. However, high-yield bond spreads were notably tighter by 9 bps. This contributed to a 1.6% return for the sector, which was on par with the return for investment grade corporates. This return was exceeded by a few fixed income sectors, including mortgage-backed securities, which returned 1.7%, and global bonds, the best performing fixed income sector. Currency dynamics, particularly the U.S. dollar’s decline was a key contributor to outperformance. The Global Aggregate Index returned a robust 2.4%, outpacing the return on the Bloomberg U.S. Aggregate Index by a full percentage point.
Real asset returns were mixed, with several sectors seeing gains on expected near-term rate cuts, while most energy-related sectors experienced losses. Global REITs were up 6.3% (12.7% quarter-to-date) with Asia REITs outperforming (+6.7%) as expectations for a September rate cut appeared all but assured. U.S. REITs gained 6.4%, led by the self-storage (+13.3%) and apartment (+10.4%) sectors, while industrial (+1.1%) and lodging/resorts (+0.8%) underperformed.
Global infrastructure gained 4.6% on rate cut expectations while returns were more muted within global clean energy (+1.3%), as manufacturers contend with lower sales prices in an effort to maintain market share.
Brent crude was down 4.8%, largely on market expectations that OPEC+ will begin to unwind its voluntary production cuts in the coming months. Coupled with strong U.S. production and decreasing sentiment around future oil demand, this caused concern that the market will be oversupplied in 2025. Natural resource equities shed 1.1% on lower oil prices.
Natural gas was up 9.5%, but was still bearishly priced at $2.1 MMBtu—at this level, any price movements are magnified percentage-wise. The outlook for the natural gas industry remains weak due to high storage levels, strong production, and expectations for a mild winter.
Gold (+2.8%) had another strong month amidst a backdrop of geopolitical uncertainty, strong central bank buying, and impending rate cuts, which would reduce the opportunity cost of holding the commodity. Gold finished August up 20.9% YTD, outpacing other real asset categories as well as the broader equity markets. Commodities were flat in August, with industrial metals (+3.4%) and precious metals (+1.9%) countering the pullback within the energy subindex (-4.3%). ⬛
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