August Witnessed Some Fireworks at the Onset, But It Quickly Waned: The month of August was highlighted by the unwinding of the “Japanese Carry Trade”. As of right now, there were no “aftershocks” from the August 5th event. In VIX terms, it opened the month at 16, peaked at 65, and closed the month at 15. Outside of this hiccup, the month was relatively strong, as breadth widened and the relatively undervalued asset classes caught a bid, cue U.S. small caps and international. We believe the performance was driven by positive earnings growth alongside better-than-anticipated inflation data that yields more victory ammo for the “soft-landing” community.
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- What is the Japanese Carry Trade? Essentially, the yen carry trade provides investment funds with very cheap debt to buy financial assets and either 1) Make a spread or 2) Lever up exposure to specific stocks or other assets. Investors used the yen because it was perceived to be predictable and would remain near zero for some time.
Let’s Talk About the Consumer: A lot of people need to read this statement on the consumer: The market is over-supplied with high-frequency information from US retail companies; it can’t be that every micro data point is taken as a referendum on the macro state of the US consumer (i.e., Dollar General Earnings, etc.). From a higher level, many of us know that over 2/3rds of U.S. GDP is driven by the consumer. If you are tracking the estimates for U.S. real GDP continue to indicate healthy growth. Economic growth supports growth in corporate profits. If profits are expanding, it’s tough to get in big trouble.
S&P 500 Q2 Earnings Recap: One of the most surprising facts of this past earnings season was that Q2 generated the biggest earnings day volatility since 2009. Personally, we think that says a little bit about where we are in the cycle, but also highlights the new phenomena of utilizing shorter-dated options.
The Fed: Bigger picture, we believe that inflation sets the trajectory of the easing cycle (i.e. can the Fed go or not go), while the growth data sets the pace and the magnitude (i.e. clip size and frequency), so the market will remain highly sensitive to the activity indicators. Yet, as of right now, Jerome Powell solidified in Jackson Hole that the beginning of an easing cycle will begin in September. As you’ll read below, the size of the cuts can indicate the forward thoughts of the FOMC.
Small Cuts Can Make a Difference: Central bank policy rates can fall sharply in a recession (with large cuts occurring even inter-meeting). But that’s not the base case currently. The goal now is to get from a restrictive to a neutral policy – smaller rate cuts may actually be preferable if that means there’s no emergency. The current outlook for rate cuts looks more like a mid-cycle adjustment vs. the panic of a recession. With numerous central banks having cut rates and others (e.g., the U.K.) likely close, there are already some green shoots developing in global demand. There’s evidence that even small rate cuts (and the anticipation of such policy regarding the Fed) can matter. In fact, they may be desirable (e.g., Fed policy in 1995).
The Caveat to Rate Cuts: The Fed reached its peak overnight rate in July of last year (14 months now), but keep in mind it was stuck for 15 months in 2006/2007 before a slowdown was evident, and ~20 months for job losses to become consistently negative. For those who don’t know, 2006/2007 looked like a soft landing too, for a while. Obviously, the imbalances in the economy are much more benign today than in 2007, but it just goes to show, that inflation cooling and rates coming down doesn’t always mean equities just rally endlessly, due to the lagged impact of higher rates on the economy. At some point, earnings may become a bigger fear as the year progresses as the full impact of the rate cycle simply has not been felt yet. But for now, the equity market wants a soft landing and no obvious reason to fight this trend until earnings trends weaken.
Keeping this Statistic in For One More Month: History tells an unfortunate tale of VPs running for the presidency when their boss is ending his term. George H W Bush was the first sitting VP to win since Van Buren in 1836 — both following a popular president. Therein lies the tale. Sitting VPs lose because they are not viewed as strong enough candidates to win the nomination or, if they do win, they become a vote on the prior president in the general election, a president whom the public has tired of (Nixon ’60, Humphrey ’68) VPs who did win, Nixon and Biden, were four to eight years removed from office. Other VPs became president because the sitting president died and then won – Roosevelt, Coolidge, Truman, and LBJ. Yet, it appears that VP Kamala Harris has done a great job making this election a referendum of choice, instead of a referendum on current President Biden.
The Presidential Election Year: Since ‘44, the S&P 500 has not declined in a year in which an incumbent president was running for re-election (avg. return of 16%). Stocks have declined in presidential election years, but in each of those cases, it was a year in which there was an open election with no incumbent running (‘60, ‘00, and ‘08). Presidents want to be re-elected and will use whatever policy levers are needed to boost the US economy. In fact, every president who avoided a recession two years before their re-election went on to win an election. And every president who had a recession in the two years before their re-election went on to lose. As of July, the incumbent is no longer running for president, but that doesn’t mean that the tool chest of liquidity will not be utilized to insulate the market, in case volatility shows its unwelcomed face.
S&P 500 EPS: ’25 (Exp.) EPS = $280. ‘24 EPS = $244 (+10.9%). 2023 = $220 (+0.5%). 2022 = $219 (+7.4%). 2021 = $204.*
Valuations: S&P 500 Fwd. P/E (NTM): 21.1x, EAFE: 14.5x, EM: 11.9x, R1V: 16.6x, and R1G: 27.8x. *
*Source: Bloomberg and FactSet, Data as of 08/31/24
Disclosures
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2409-1.
