August Perspective
What’s New
August, for many, is the last full month of summer. Time for one last trip to the beach, barbeques, back to school shopping and college move-ins. With so much going on, it is not surprising that it tends to be a quieter time in the financial markets. This year, however, US fiscal and monetary policy news stepped up to ensure the month was anything but quiet.
The US federal deficit took center stage as it crossed the $40 trillion threshold for the first time. This ushered in renewed concerns about the long-term financial health of the nation. The Dollar weakened and yields increased on longer dated Treasury bonds. This also inspired a rally in assets such as gold and Bitcoin that are seen by some to be alternatives to the dollar and other paper currencies.
The month ended with all eyes on monetary policy as Fed Chair Kevin Warsh delivered his highly anticipated remarks at the annual Jackson Hole Economic Symposium. Warsh provided his clearest thoughts to date regarding the elevated state of inflation relative to the Fed’s target and his commitment to using the Fed Funds rate as the primary tool to address the issue. Odds of a rate hike in September implied by the futures market once again sit at greater than 50%.
Our Perspective
Months like August tend to bring out a flurry of interest in investment strategies that offer potential insurance against a precipitous decline in the status of the US Dollar on the global stage. While such tools exist, they are often expensive; especially in times when interest in them is high. In many ways it is like trying to buy flood insurance after there is already water in your house. Rather than reaching for niche hedging products after the fact, a more durable answer may already be sitting in a well-constructed portfolio.
Equities have historically offered a built-in inflation buffer: as prices rise, so do revenues and, over time, earnings. International stocks add a second layer of protection worth considering. Because they are priced in local currencies, a weakening Dollar can translate into a tailwind for US-based investors.
It's also worth noting that Fed Chair Warsh's rate-hike posture could offer the Dollar near-term support, even as the longer-term fiscal backdrop remains a headwind. Currency and rate dynamics rarely move in a straight line, which is itself a good reminder for why a portfolio built to withstand multiple scenarios beats one positioned for just a single outcome. Our recommended path forward is rooted in diversification, risk management and a long-term approach to asset allocation.
Our View
Stock Market
US large cap stocks extended their winning streak into a fifth straight month, with the S&P 500 gaining 2.7%. Returns were more mixed at the sector level with only 5 of the 11 sectors positive on the month. Energy led the markets higher on renewed Middle East tensions. Tech shares were close behind as strong earnings releases pushed the sector higher.
Bond Market
Yields on longer-dated Treasuries pushed higher, with the 10-year note ending August near 4.7% and the 30-year hovering around levels not seen since 2007. Rising government borrowing tied to the growing federal deficit remained the primary driver, compounded by Chair Warsh's reaffirmed focus on using the Fed Funds rate to fight inflation.
In Focus: Small Cap Stocks
US small cap stocks are quietly having one of their best years of relative performance vs. large cap stocks in some time. Year-to-date, the S&P Small Cap 600 Index has returned 20.8% vs. 13.1% for the S&P 500. This is a good reminder of the benefits of diversification within stock portfolios across not only sector and geography but size as well.
Themes Driving Markets
Energy Bottlenecks
Conflict around key shipping chokepoints keeps unsettling oil markets. Even after tensions ease, prices historically take longer than expected to normalize.
Bottom line: Slow normalization could sustain inflation pressure and keep the Fed leaning hawkish.
AI Spending
Spending on AI infrastructure has scaled to rival the largest capital investment cycles in US history.
Bottom line: The size of the bet raises the stakes for the companies funding it and the markets riding its momentum.
Market Sentiment
Investor risk appetite has climbed back toward levels last seen near prior market peaks, with signs of froth building beneath the surface.
Bottom line: A surge in IPO activity and rising margin debt point to a more speculative, later-cycle mood.
In Case of Emergency: Break Piggy Bank
Every September, National Preparedness Month reminds us to prepare for the unexpected by stockpiling supplies and confirming evacuation plans. The same applies to your finances: build an emergency fund and know when to use it.
Beyond practicality, it buys peace of mind. Covered near-term needs mean you won't have to sell long-term investments at the worst possible time. With markets near their highs, it's tempting to keep every dollar invested for growth, but a reserve of cash is what lets you stay invested through the next bout of turbulence without flinching.
Aim for several months of expenses (more if near retirement), kept somewhere safe and accessible, like a high-yield savings or money market account. If you haven't looked at your emergency cushion lately, now's a good time.
Sources: S&P Dow Jones Indices LLC., YCharts.
All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed.
The S&P 500 Price Return Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees, expenses, or adjust for cash dividends.. The S&P 500 Total Return Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees or expenses. The index accounts for the reinvestment of regular cash dividends, but not for the withholding of taxes. The S&P SmallCap 600 Index is an unmanaged, capitalization-weighted measure of 600 small U.S. companies with market capitalizations between $300 million and $1.4 billion listed on the on the New York Stock Exchange and the NASDAQ stock market. The Index returns assume daily reinvestment of dividends, and do not reflect any fees or expenses. Index data referenced herein is the property of S&P Dow Jones Indices LLC, a division of S&P Global Inc., its affiliates ("S&P") and/or its third party suppliers and has been licensed for use by Manning & Napier. S&P and its third party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions.
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