U.S. equities and bonds ended a volatile August lower as investors came to grips with increased rate-hike expectations after global central banks vowed to step up their wars against inflation. In a classic tale of two halves, the S&P 500 had advanced over 4% through August 16 amid continued hopes that the Federal Reserve would signal an early dovish pivot away from aggressive rate hikes on indications of peaking inflation. However, the S&P 500 sold off over 8% during the second half of the month as the central bank resolved to stay hawkish, even at the expense of a potential growth slowdown.
All three major U.S. equity indices posted their worst returns since June and their largest August losses since 2015. Moreover, from stocks to bonds to commodities, virtually every asset class slid, having the largest unified cross-asset monthly drop since December 1981. Individual asset classes had larger historical losses such as the approximate 12.5% pandemic-related loss on the S&P 500 in March of 2020, so this 4% loss pales in comparison. Overall, the S&P 500 has given back around half of its summer relief-rally that began in mid-June.
Corporate earnings continued to roll in better than feared with strong profit margins suggesting higher prices charged by businesses are outpacing their increased costs of production and labor. Aggregate after-tax profit margins for non-financial corporations improved in the 2Q to 15.5%, the most since 1950, from 14% in the first quarter.
In August, all equity styles of companies posted negative returns for the month and year-to-date. Growth-oriented companies did post deeper August losses in Large and Mid Caps, while the reverse was true in Small Caps with larger losses in Value. Value continues to outperform on a YTD basis. Growth is negatively correlated to rising interest rates, as future expected profits decline in present value calculations.
In sector performance, of the 11 major groups only two of the three defensive-oriented sectors posted August gains, led by the continued dominance of Energy. Energy and Utilities extended YTD gains, while Consumer Staples deepened their 2022 losses. Technology was the largest detractor to August performance, while Consumer Discretionary and Communication Services are down the most so far this year.
Foreign equity markets were mixed in August, with the MSCI EAFE Index (representing developed markets outside of the U.S. and Canada) having a 0.67% greater loss relative to the S&P 500. Japan had among the smallest losses in developed markets, down 2.55%, while the United Kingdom (-6.37%) and the European region (-6.23%) declined the most. Emerging markets outperformed (+0.42%), climbing
fractionally, with a strong August in Brazil (+6.40%) and India (+4.11%). Gains were mostly offset by declines in Mexico (-5.00%) and South Korea (-3.32%). China rose 0.22%.
Turning to fixed income markets, Treasuries ended August with the yield on 10-year Treasury notes at 3.13% while the two-year Treasury yield finished at 3.49%, its highest since 2007. On a broader basis,
investment-grade bonds fell by 2.83%. Bloomberg’s U.S. High Yield Bond Index, representing holdings of below investment-grade (junk-rated) corporate bonds, fell 2.30% last month. Municipal bonds outperformed the U.S. Aggregate Bond benchmark index, falling a lesser 2.19%.
This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.