This market update highlights key developments across equities, fixed income, and the broader economic landscape.
EQUITIES – Markets Returned to Record Territory with Broad Global Participation
August was a good month for stocks around the world. The S&P 500 returned 2.27%, setting fresh record highs along the way, including its first close above 7,800 in mid-month. Just as encouraging as the gains themselves was how broadly they were shared. Technology led, rising nearly 6% as the chip stocks that stumbled in July found their footing again, but materials, healthcare, and energy each gained more than 5% as well. Smaller U.S. companies, as measured by the Russell 2000, returned 1.01% and touched new highs of their own during the month. The rally was global: emerging market stocks gained 3.39%, developed international markets (MSCI EAFE) rose 2.01%, and the MSCI ACWI, which tracks stocks across the globe, returned 2.70%. Markets did give back some ground on the final trading day as tensions in the Middle East flared over the closing weekend, but the month’s gains held comfortably. Underneath the headlines, the story of August was straightforward: corporate earnings, particularly from the technology companies at the center of the artificial intelligence buildout, came in strong enough to justify the market’s optimism.
SPOTLIGHT: THE CHIP SECTOR ANSWERS THE DOUBTERS – A Blowout Quarter from Nvidia Reset the Conversation
In last month’s communication we described July’s sharp pullback in semiconductor stocks as a repricing of expectations rather than a deterioration in the underlying businesses, and August put that interpretation to the test. The answer came on August 26, when Nvidia, the company at the center of the artificial intelligence buildout, reported quarterly revenue of $96.2 billion, more than double what it earned a year earlier and comfortably ahead of expectations. The stock rose nearly 9% the next day, and the strength spread across the sector. The memory chip makers we have followed all year participated fully in the recovery. The supply and demand picture we have described in prior communications remains firmly in place: industry forecasts now expect the newest generation of high-bandwidth memory to become the mainstream product in the second half of this year, and SK Hynix announced a $38 billion investment in two new plants during the month, a signal of how much capacity the industry believes it needs to build. AMD continued its strong year, and the sector broadly recovered the ground lost in July. The lesson we would draw from the July-to-August round trip is one we have emphasized before: when prices fall but business results keep beating expectations, the pullback tends to be an opportunity rather than a warning. That said, after gains of this magnitude, we continue to favor participating in this theme through diversified exposure rather than concentrated positions.
BONDS – Yields Drifted Higher, and the Treasury’s Buyback Program Got to Work
Bond yields moved modestly higher in August. The 10-year U.S. Treasury yield ended the month at 4.75%, up from July’s close, while the 2-year finished at 4.34%, leaving the yield curve positively sloped with the 10-year offering about 41 basis points more than the 2-year. Even with yields rising, the Bloomberg U.S. Aggregate Bond Index returned a positive 0.39% for the month, a useful illustration of a point we have made throughout the year: at today’s yield levels, the income bonds generate provides a real cushion, allowing the broad bond market to post positive returns even in months when rates drift upward. Mid-month, the Treasury Department announced it would at least double the size of its bond buyback operations for longer-dated maturities, a targeted tool to support liquidity in the segment of the market where selling pressure had been concentrated. We covered this in detail in our special update on August 19. The short version is that it is a sensible market-maintenance measure, the initial market response was positive, and the first expanded operations begin in early September. Corporate credit, meanwhile, remained a picture of calm, with the extra yield on both investment-grade and high-yield company debt near its lowest levels in decades. For income investors, high-quality bonds at these yields remain one of the most attractive opportunities in a generation.
THE FEDERAL RESERVE – A Clear Message from Jackson Hole: Finish the Inflation Job
The Federal Reserve’s annual Jackson Hole symposium in late August gave Chair Kevin Warsh his most prominent platform since taking office in May, and he used it to deliver a clear message: inflation remains above the Fed’s 2% target, recent improvement is welcome but not yet convincing, and the central bank intends to finish the job of restoring price stability. He also reiterated his preference for saying less about the future path of rates, arguing that markets should not look to the Fed for their next trade. Markets took the speech seriously, and short-term bond yields rose in response. Our own view has evolved with the Fed’s tone. We continue to believe rate cuts are off the table for the near term, and we now see a genuine possibility that the Fed surprises markets with 25 to 50 basis points of rate increases before year-end to cement its inflation-fighting credibility. Counterintuitive as it may sound, we would expect such a move to be good news for longer-term bonds. Yields on bonds maturing in ten years or more are elevated today partly because investors demand extra compensation for the risk that inflation lingers; a Fed willing to act decisively would strengthen confidence that inflation gets contained, and we would expect yields on those longer-dated bonds to decline as a result, lifting their prices. The next policy meeting concludes on September 16, followed closely by the Bank of Japan’s meeting, where a rate increase is widely expected as Japan continues its gradual return to normal interest rates, a theme we explored in our August special update. The yen, which the U.S. and Japan acted jointly to support in early August, remains an area to watch as those policies converge.
THE ECONOMY AND GLOBAL EVENTS – A Mixed but Fundamentally Sound Picture
The economic data released in August painted a picture with genuine crosscurrents, but one that remains fundamentally sound. On the encouraging side, second-quarter growth was confirmed at a 1.5% annualized pace with impressive detail beneath the surface: consumer spending grew at a healthy 3.4% rate and business investment surged 8.5%, much of it tied to the artificial intelligence buildout. Manufacturing activity reached a four-year high, with the ISM manufacturing index at 55.6 and factory employment expanding for the first time in a year and a half, while the services sector remained comfortably in expansion. On the softer side, employers shed 23,000 jobs in July, the first negative month in some time, though the unemployment rate actually ticked down to 4.1%. Inflation, at 3.4% by the consumer price measure and with core inflation at a moderate 2.5%, continued its gradual improvement, though the Fed’s preferred gauge ran somewhat warmer. Consumer confidence, as measured by the Conference Board, softened to 89.4. In the Middle East, the month ended with renewed tensions after a period of relative quiet, and oil finished the month in the mid-$80s per barrel, still well below the spring peaks. Our view on this remains what it has been: the trajectory over the past several months has been toward normalization, the process was never going to be a straight line, and we continue to expect the situation to work its way toward resolution over time.
BOTTOM LINE – Strong Fundamentals, Attractive Income, and the Value of Staying the Course
August reinforced the central themes of this year. The market’s advance is being driven by genuine, verifiable business results, with Nvidia’s extraordinary quarter the latest and largest piece of evidence, and it is broadening across sectors, company sizes, and geographies rather than narrowing. Bonds are quietly doing exactly what investors need them to do, generating meaningful income that cushions portfolios even in months when yields rise. The Federal Reserve is being deliberate and clear about finishing the inflation job, which we view as a long-term positive for both markets and the economy, even if it means rates hold at current levels or move modestly higher first. And the geopolitical picture, while still producing headlines, has been gradually improving for months. For investors who stayed disciplined through July’s technology pullback, August delivered the reward, the latest in a series of reminders this year that reacting to short-term swings is costly and patience is compensated. Our approach is unchanged: quality companies, genuine diversification, and bonds generating real income. We are watching the mid-September Fed and Bank of Japan meetings and the first expanded Treasury buyback operations, and we will keep you informed as the picture develops. As always, we welcome the opportunity to discuss how these developments relate to your specific financial plan.
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.