Through late August, the S&P 500 was down between 3.5% to 4% for the year as investors reflected upon the three pillars that have driven the stock market for most of this year:
1-Soft landing
2-Disinflation
3-End of interest rate hikes by the Federal Reserve (the “Fed”).
Investors have also expressed enthusiasm about Artificial Intelligence (AI) and weight-loss drugs.
The soft-landing theory was driven by US GDP, which rose an annualized 2%, 2.4% and 5.8% in Q1, Q2 and Q3 (as of late August), respectively (according to the forecasting tool of the Atlanta Fed). Also, new weekly jobless claims of around 238,000 as of the third week of August were well below 300,000. But questions remain about whether the soft landing will be somewhat harder than anticipated.
The one-year expectations of inflation dropped from 3.8% in January to 3.4% in July. But the Consumer Price Index (CPI) rose to 3% and 3.4% in June and July, respectively, while the Producer Price Index rose 0.1% and 0.8%.
The Fed may pause rate hikes and start reduction towards year end. The Fed Funds Future Markets expect interest rate cuts between March and May 2024, which has put some pressure on the bond market, while the rising yields, in turn, put pressure on the stock market.
The two-year Treasury rates rose to 5.04% in late August while interest rates rose 0.8% from the end of January. The 10-year Treasury rates increased from 3.54% to a 16-year high of 4.21%, which caused the 30-year fixed-rate mortgage to rise to 7.7%, the highest in 23 years.
At The Family Office, we recommend a diversified approach in liquid markets.
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