The month of August saw some extreme volatility to kick off the month, but the markets then regained much of the loses by the end of the month.
The end of the month saw the Nasdaq up 0.7%, TSX was up 2.7%, S&P500 was up 2.4%, while the Russell 2000 pulled back -1.5%, however this was off a stellar July which saw the small-mid cap index gain over 10% (according to ycharts.com). On the bond front, looking at the Vanguard US Aggregate Bond Index ETF, it was up 0.95%, and the Vanguard Global ex-US Aggregate Bond Index ETF was up 0.29% (according to finance.yahoo.com).
August started with the S&P500 dropping -3% and the Nasdaq dropping -3.4% on August 5th. Not the ideal scenario to see on our holiday Monday here in Canada. As you may have read in last month’s update, I shed some light on what caused the early August volatility. But as a quick recap, the perfect storm consisted of disappointing US economic data showing the unemployment rate rise to 4.2%. Also, Japan increased its interest rate to 0.25% from 0.10%, this resulted in higher costs to borrow Japanese yen and invest it elsewhere. Lastly, the Magnificent 7 were sold off as investors start to think the AI trade will take longer than expected to payoff.
The selloff that started the month was short lived and it could be argued was slightly overblown as the markets bounced back nicely. Further on the good news front, the reported Canadian Inflation Rate on Aug 20th came in at 2.5%; this was in line with expectations and down from 2.7% the previous month. In the US, the headline inflation rate reported on August 14th was 2.9%; this was below the expected 3% and lower than the previously reported 3%.
The lowering of headline inflation numbers is one of many signals monitored by central banks for potential future interest rate cuts. From May to the end of August the Bank of Canada cut rates twice; as of this writing, the BOC also made an additional 0.25% cut on September 4th, bringing the current rate to 4.25% from the peak of 5%.
On September 18th, all eyes will be on the US Federal Reserve as they announce their latest interest rate decision. Rates in the US have been at 5.5% since July 2023. The consensus in the markets is that there will be a 0.25% cut in the US, which will be a boost for the equity and bond markets. To paraphrase Fed Chairman Jerome Powell, “All decisions are made on a meeting-by-meeting basis” but hopefully if inflation and other indicators continue in the right direction, we will see a period of rate cuts in the US not only start soon, but continue on down the line.
If you have any questions on your portfolio or the markets, please just let me know and I am happy to help.
