by Brad McMillan, Chief Investment Officer, Commonwealth Financial
August saw modest market pullbacks across the board, as investors were nervous about risk. The U.S. indices were down by low single digits, with the Nasdaq doing the worst. International markets also pulled back—developed markets were down slightly more than U.S. markets, and emerging markets performed worst of all. Even fixed income declined, as higher interest rates drove the U.S. Aggregate Bond Index down slightly. Financial markets spent the month in a risk-off mode, hurting riskier investments like tech stocks and emerging markets at the expense of more boring ones.
Looking Back
The economy. The market performance reflected the underlying economy. While the second quarter’s economic growth came in stronger than expected, the data showed that growth is likely to slow. Further, business and consumer confidence pulled back, and inflation showed signs of ticking up again, even as job growth continued to slow. There was some good news, as income and spending growth beat expectations. But overall, the data was weak enough to increase investor concerns.
The Fed and interest rates. Despite those concerns and August’s weak market performance, markets rallied toward the end of the month, on hopes that the Fed might pause its rate increases. Rates ran up before the central bank’s Jackson Hole conference and Chair Powell’s speech but have since pulled back. Inflation is up slightly, but a deeper analysis of the data shows the trend should still be down. While growth has slowed, the economy is still growing. And that slower growth should also be good for inflation. So, while progress may be moderating, we are still moving forward.
Looking Ahead
Weak data expectations. September may be another difficult month. Market performance in September has historically been weak, and climbing rates at the start of the month will not help. With expectations for weaker data and consumer confidence down, there is downside risk in economic expectations. Markets shifted to a risk-off mode last month and will likely stay that way in September.
Potential growth ahead. As we look further ahead, the news is likely better. Economic growth estimates for the third quarter are still healthy, which will help after quarter-end. Earnings estimates are starting to be adjusted up, which will be positive, and business confidence has ticked up as well. While short-term weakness is likely, conditions may improve as we enter the final quarter.
We saw some weakness in August, which seems to be continuing in September. But looking past September, the data and conditions are likely to improve.
Positive Trend in the Long Term
And that is the bottom line here: August was a difficult month, with weak data, and September may be the same. Beyond that, though, the prospects remain good. Any recession is likely some time away, which should keep markets healthy.
Despite a weak August and the possibility of a difficult September, conditions remain favorable overall. And while volatility may show up, the trend will likely remain positive over the longer term.
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Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation's largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth's investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.
Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results.
Commonwealth Financial Network is the nation's largest privately held independent broker/dealer-RIA. This post originally appeared on Commonwealth Independent Advisor, the firm's corporate blog.
