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Trends Aren’t Always Friendly
Much of the commentary in financial markets recently has been focused on two key economic trends; inflation and unemployment. We can prove the interest in these topics by the public as well with the help of search trends. Google Trends allows users to understand search activity for specific subjects. Scoring is a range of 100 showing peak popularity and 0 meaning no popularity. The average score for the search topic ‘inflation’ was 68.6 for the past 52 weeks and 42.3 for the search topic ‘unemployment’.
It is not surprising that these terms are searched for regularly by investors. They are also a clear focus of the Federal Reserve as they work to manage interest rate levels for the US economy going forward. We will discuss interest rates shortly, but first I want to focus on the third topic in our Google Trends analysis.
0.8 is quite clearly a topic not often searched for by anyone with a wi-fi connection it seems. It was the score of our third search topic ‘corporate earnings’.
Earnings are a primary building block for stock market performance, much more so than inflation or unemployment, yet you would never know it by judging search activity. August was a very busy month for corporate earnings announcements, and we learned a lot which may impact future earnings and market performance expectations.
Stock Market Performance: Insightful Volatility turns to healthy gains
The broad S&P 500 Index posted a volatile yet insightful 2.3% gain in August. The month started with extreme volatility and risk-off behavior across global markets. The volatility was short-lived, and risk sentiment rebounded within a few trading days. However, we believe this short-term temper tantrum offers an opportunity for investors to check in with their ability and willingness to take risks in their portfolios. How anyone did, or did not, react to the start of the month can be very insightful for planning purposes.
Last month we talked about the concentration in performance for the equity markets, mentioning that we did not see this narrow of a market in nearly 30 years. August was a very good month in this regard. There are several reasons; history, reversion to the mean, valuations, but also……you guessed it, earnings!
August is when most public companies in the U.S. announce their 2nd quarter earnings results, and we learned a good deal about the broad revenue growth. FactSet shows strong revenue growth across many of the economic sectors in the S&P 500 Index. Technology continues to lead the tables for revenue growth, as expected. However, it is very promising to see all sectors but one, Basic Materials, produced positive growth from a year earlier in the second quarter.
Fixed Income Market: "the time has come for policy to adjust."
The primary focus of the Fixed-Income markets in August was a speech given by Federal Reserve Chairman Jerome Powell in Jackson Hole, WY in the latter half of the month. In his speech, Mr. Powell proclaimed, “the time has come for policy to adjust,” as it relates to interest rate policy. This is a key change in the trend for interest rates.
Since last year, August 2023, the Federal Reserve’s interest rate policy was to do nothing and hold Federal Funds target rate between 5.25-5.50%. The recently previewed adjustment to this policy means that we should expect a period of interest rate cuts beginning on September 18th. It is nearly certain there will be a reduction of either ¼ or ½ of a percent to the interest rate target announced later this month. It should be expected that the new easing policy will play out over the next 9-15 months.
Initially, we do not expect any major initial impacts of the new policy. There are often long and variable lags with interest rate policy moves impacting the day-to-day economy. We expect a few months of data to be required before investors fully react to the reduced income from savings due to these interest rate changes. We also expect an increase in economic activity and investment opportunities to present themselves as time passes as well. In the meantime, we will monitor consumer spending trends, business lending, and economic activity to assess any impacts of this new easing trend.
Looking Ahead: When does one trend end and another begin?
Thanks to the availability of technology, we can confidently say that we have a good idea of the trends in what is on investors’ minds. We see some trends looking to continue and some new trends emerging. There continue to be many reasons to be optimistic, but there are also some potential changes to trends that we will be watching closely for impact and opportunities.
In equities, we have seen a trend of strong performance continue and will monitor closely. We hope to see the trend of broadening out in breadth of performance to continue, both in markets and earnings.
In fixed income, we know there is a new trend, or policy, on the interest rate easing cycle. We also know the impact of this new trend will be variable, requiring us to study many different areas of the economy to assess what new trends may develop.
Of course, we will be alongside the majority focused on the downward trend in inflation and assuring there is no upward trend in unemployment as well.
One trend you can count on continuing is our commitment to planning, planning, planning. All portfolios built at SCP are driven by a client’s financial plan, where the focus will always remain. We continue to perform well on portfolio management construction and decision-making throughout this environment and will continue to do so.
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