Market Recap – Week Ending Sept. 6
Stocks Fell Sharply; CPI Report on Wednesday
:Stocks fell sharply across the globe last week as a weak jobs report in the U.S. increased concerns around the strength of the domestic economy. In the U.S., the S&P 500 index recorded its worst week in 18 months, ending the week 4.2% lower. Meanwhile, the tech-heavy Nasdaq Composite index fell 5.8%, its worst week since 2022. In economic data, nonfarm payrolls rose 142,000 in August, below consensus expectations, adding to fears of a slowing labor market. In bonds, yields fell sharply with the 2-year and 10-year Treasury notes finishing the week at yields of 3.65% and 3.71%, respectively. Of note, this was the first time in more than two years the curve “uninverted”, i.e., the spread between the 2-year and 10-year notes is now (finally) positive. This week, focus will be on the Consumer Price Index (CPI) report due out Wednesday, with expectations for headline CPI to fall from 2.9% to 2.6% annualized. As investors look forward to the Federal Reserve meeting next week, inflation data this week will be the last critical piece of economic data before the Fed meets. According to CME FedWatch data, markets now are pricing in about a 75% chance of a 25-basis-point rate cut and a 25% chance of a 50-basis-point following the meeting next week.
Update on Fixed Income (from JP Morgan): Leaves aren’t the only thing falling in September. The Fed is gearing up to cut rates, which has the potential to alter the investment landscape, prompting investors to review their portfolio allocations. In a falling-rate environment, it’s often wise to lean more toward fixed income, especially longer-duration bonds. But investors shouldn’t stop there. It may be beneficial to rethink what strategies they are using. The fixed income market is a labyrinth compared to the relatively straightforward equity market. While there are about 5,700 publicly listed companies in the U.S., the bond market is vastly larger and more dynamic, with an estimated one million or more individual bonds in circulation and new issuances occurring regularly. To add another layer of complexity, fixed income indices usually capture just a fraction of the market. The U.S. fixed income market is approximately double the size of the most commonly used fixed income index. By sticking with passive investing, investors may be leaving opportunities on the table. For example, securitized bonds, which tend to be heavily excluded from indices, currently offer yields of 4.5% on average, almost 1% higher than U.S. Treasuries. This is where top active fixed income managers shine, often outperforming the index. According to Morningstar, core bond managers in the top decile achieved an annualized performance of 4.2% over the past 20 years compared to 3.5% for the benchmark. Investors should consider taking an active approach to fixed income investing to unlock benefits such as enhanced returns and better risk management.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC.
This communication is for informational purposes only. It is not intended as investment advice or an offer or solicitation for the purchase or sale of any financial instrument.
Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results.