End of August Market Thoughts

1.      Growth stocks seem a little tired.  Give them credit where it is due, they have sizzled over the last few months.  However, in the wake of Nvidia’s extremely-solid-but-not-quite-lights-out earnings report and strong-but-not-pound-the-table-strong forward guidance, investors have decided that the tech sector might need to rest for a little while.  Secondary tech names are getting crushed when they disappoint, and even some leaders (Microsoft, Meta) are giving back all of their post-earnings gains.  Apple was the best performing Mag 7 stock in August because it has tens of billions in cash on hand.

2.      Defensive stocks started to catch a bid in August.  Speaking of large cash hoards, Berkshire Hathaway had been selling off for three straight months after Chairman Warren Buffett announced that he was stepping down back on May 3rd.  It hit a low of $459 on August 4^th, off 15% from its May 2 high.  It’s up $45 (10%) since then.  High free cash flow as a factor, which lagged badly from January through July, was the second-best factor in August (after small size).  Even beat-up health care stocks began to catch a bid this month.

3.      Every knock against the Federal Reserve as an institution or at individual members of the Fed only serve to make investors nervous about America’s commitment to sound monetary policy.  And as result, they buy more gold.  Gold bullion gained 4% in August.  Gold mining stocks soared 19%, because the price of gold is now so much higher than the cost of mining it.  If you are curious, bitcoin fell 7% in August.  Whatever it is, bitcoin is not a hedge against financial instability.

4.      The dollar declined in August after a very strong July.  Not surprisingly, foreign stocks outperformed U.S. stocks in dollar terms.  Vietnam was the best performing foreign market (and I think we all can guess why).  China was the best larger market, which is obviously related to the strength in Vietnam.  India was the worst foreign market, probably due to the tariffs imposed on them by the Trump Administration to punish them for buying Russian oil.  Brazil is also being punished by Trump (in this case for matters completely unrelated to national security), but it still managed to gain 10% last month. 

5.      I would like to tell you that all the strategists were right and lengthening maturities in August paid off.  And to a degree I can – intermediate term bonds added about 1.2% versus 0.4% for ultra-short (less than 9 months) bonds and 0.7% for short term (9 months to 3 years) bonds.  If you bought long bonds, however, your return diminished.  The benchmark gained 0.9% while the 30-year lost 1.5%.  Investors are worried about long term inflation.  That’s why the best domestic bond category last month was inflation protected securities (+1.5%).  Overall, the best category was local currency emerging market debt (+2.1%). 

6.      September is seasonally not a very good month for U.S. stock investors.  With technical indicators already showing signs of upside exhaustion, be careful here.  You’ll probably get a better buying opportunity in October.  Even the hope of a Fed rate cut on September 17 is probably already discounted in stock prices, so it likely wouldn’t move the market unless Powell suggested that more cuts were coming.

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