After a string of positive months, the S&P declined 1.7% in August, its first negative month since February. The first half of the month, the S&P 500 declined 4.78% then rebounded to pare the decline to close the month. The DOW declined 2.36%, Mid-Caps shed 3.04% and small caps declined 4.33%. The NASDAQ declined 2.1%, while the NASDAQ 100 (QQQ) declined 1.5%. Bonds (AGG) was down .64% on the month. Developed non-US markets (CWI – our benchmark international proxy) declined 4.9%.
Though our model portfolios were also down, each outperformed their benchmark by about 19%, declining less. Steering clear of non-US companies aided in the relative outperformance, as did exposure to energy.

WHAT MOVED THE MARKETS
Interest rates were once again the main driver of stock market returns. Rates crept up during the month, with the 10-year treasury eclipsing the previous cycle high hit last October. This rise in bond yields pressured elevated valuations, while earnings season confirmed a third quarter of declines. However, positive economic data in the second half of the month helped the market advance from their mid-month lows. Seasonality likely also impacted the markets, as many on Wall Street were on vacation during August, and low volume can lead to heighted volatility.
The market entered August a bit “overbought”, meaning gains were stretched and stock prices were quite elevated above their respective 50 day moving average. As a function of time (one month) and price (generally down), the market cooled down quite a bit and was no longer overbought at month’s end.

On August 3rd, Fitch, one of the three credit rating agencies, downgraded US government credit for the first time since 2011. The rating downgrade seemed to be an excuse for the market to sell off. Then, on August 8th Moody’s, another credit rating agency, downgraded the credit rating of 10 mid/small size banks, and charged a negative outlook on 11 others.
On August 10th, the consumer price index (CPI) showed an increase of .2% for the month. CPI peaked 13 months ago, so moving forward, it will be more difficult for CPI to continue the rate of declines since the year over year is coming off that high level in July 2022. This increase was mainly due to higher energy and commodity costs, and not a broad price increase across other areas of the economy.

August 11th data on the Producer Price index (PPI) showed a slight increase from the prior month, reversing the trend of declining producer prices. Whether this is a true reversal or simply a one off is yet to be determined, but if inflation starts to re-emerge again, then the Fed will likely have to keep raising rates more than what the market has priced in, as well as keep rates higher for even longer, which could put some pressure on the stock market’s continued advance.

August 29th job openings (JOLTS) reading came in softer than prior months, meaning fewer jobs are available, and fewer workers are quitting. This suggests the labor market is cooling down, which robust labor force has been keeping inflation elevated. This was a positive data point that helped the market advance into the close of the month.
Finally, on August 30, 2Q GDP was revised downward, implying the economy was a bit weaker than initial estimates.
Each of these factors point to a cooling off in the economy, but still strong enough to suggest a recession is less likely. As bad news becomes good news (ie: softer economic data lowers the odds of further rate hikes), the market has found its footing and buyers are re-entering the market, pushing stocks higher.

PORTFOLIO ADJUSTMENTS
August was another busy month of trading, making small adjustments throughout the month as trends changed. Energy was the best performing sector during August, gaining 1.8%. Utilities were the worst performing sector, losing 6.2%. REIT’s, Basic Materials and consumer staples sectors were all down over 3% for the month.

The below trades resulted, in the aggregate, a reduction in traditional value and buying into energy. A lot of small moves, but each positioned us in a better area of the market as trends changed throughout the month. For instance, COWZ was up .8% in August, which makes it clearer why we were accumulating this position throughout the month. During the first half of the month as the broad market declined, we were reducing exposure to the S&P 500, and then started accumulating again as the mid-month rebound ensued. We continue to be very pleased with the trading activity and results.

  • On August 3rd, we trimmed our S&P 500 (SPLG) position, in addition to value (SPYV) and MOAT. Proceeds were invested in QQQ, as well as initial buys of COWZ and GCOW, two “value” funds whose largest sector exposure is energy.
  • On August 7th, we further reduced exposure to SPLG, sold NOBL, and increased exposure to COWZ and SPGP (which also is somewhat of an energy play).
  • August 8th we further reduced SPYV and increased our COWZ position.
  • On August 9th, we further trimmed our SPLG position, sold out of GCOW and reinvested the proceeds to COWZ.
  • On August 11th, we trimmed QQQ and bought more COWZ.
  • On August 15th, we further trimmed QQQ, evacuated our small position in vanguard value (VTV), and allocated the proceeds between MOAT and COWZ.
  • On August 17th, we sold out of MOAT, further trimmed our SPLG position, and again added exposure to COWZ as well as a small allocation to GCOW.
  • On August 21st, we evacuated our convertible bond position (CWB) and repositioned the proceeds to FLOT, a floating rate bond fund. We also sold out of GCOW, capturing a 2% gain, trimmed SPYV, and increased exposure to SPLG. We also entered a small position in RPG, Invesco’s “pure” growth fund. This provides us exposure to growth stocks that are outside of the mega cap tech names dominating the broad indexes given their size and weighting in the index.
  • August 25th we evacuated SPYV, trimmed SPLG and COWZ, and bought GCOW, MOAT and NOBL.
  • On August 29th, we sold out of GCOW, again capturing a small gain, and reinvested the proceeds into SPLG.
  • Finally, on August 31st, we flipped back to COWZ by trimming our SPLG position.

    LOOKING AHEAD
    With 2Q earnings season largely in the rear-view mirror, the market will likely be eyeing upcoming economic data and the bond market for signals of whether the Fed will be able to cease their rate hike campaign, or whether more rates hikes are ahead. If energy continues to increase, pulling up the cost at the pump, such inflationary trends may tempt the fed to keep rates higher for longer. The bond market is also suggesting that there may be a slowdown ahead as long rates have risen slower than shorter rates.

    September tends to be somewhat of a sloppy month, so we anticipate additional chop. However, we are of the belief that there is a good chance for the market to advance during the 4Q as portfolio managers are still widely underexposed to mega cap tech and may need to chase those names if they have missed out on the outsized run during the first half of the year.
    As always, we will continue to monitor your accounts daily, and make tactical allocation adjustments based on price observation and trends.