Financial markets continued their advance in August, with the S&P 500 gaining 1.9% and bonds up 1.2%. The DJIA gained 3.2%, but it was mid and small caps that gained the most, up 3.25% and 6.9% respectively. S&P equal weight gained over 1%, while the NASDAQ QQQ took a breather and was virtually flat for the month. Value (VTV) gained over 2% and the rest of the developed world (CWI) gained 2.5%.
For the month, stocks outperformed bonds, value outperformed growth, and international outperformed the U.S. We welcome the broadening of market gainers beyond mega cap technology.
TWG growth, moderate and conservative gained .70%, .75% and .85% respectively. These softer returns were mainly a result of being overweight large cap growth during the month.
WHAT MOVED THE MARKETS
The July jobs report showed a significant slowdown in hiring. Downward revisions to prior months are signaling a cooling U.S. labor market.
In response to the softening labor market, Fed Chair Powell, in his Jackson Hole speech on August 22, hinted at a potential interest rate cut at the upcoming September meeting. This shift in the Fed’s stance was a major positive for the market, as lower interest rates can stimulate economic activity.
Despite the cooling labor market, core inflation accelerated to 3.1% year on year, complicating the Fed’s dual mandate of maximum employment and stable prices.
Second quarter earnings season was robust. The majority of S&P 500 companies beat estimates, demonstrating corporate resilience and providing a fundamental underpinning for the market’s gains.
Tariffs imposed by the U.S. Government remain a source of volatility. New tariffs, particularly on Indian and Russian exports were a key factor for market participants.
PORTFOLIO ADJUSTMENTS
To start the month, portfolios were well diversified across a mix of growth and value-oriented ETF’s, with the largest allocations in QQQ, SPLG and RPG. This blend balances broad market exposure with a significant tech-heavy growth tilt. Smaller positions such as IWF, VTV and IWP provided additional style and sector diversification. The portfolio’s risk profile early in the month was moderately elevated, primarily due to weightings in QQQ and RPG, which tend to have a higher beta and volatility compared to the broad market. However, the return potential is reasonably balanced, showing modest appreciation across holdings. The allocation set a solid foundation by blending growth and value styles, ensuring portfolios benefit from broad market upside while limiting unmanaged risk.
By the end of the month, the portfolios reflected tactical shifts aimed at enhancing growth exposure while managing risk through increased diversification. New additions such as IEV (Europe) provide international developed market exposure, enhancing diversification beyond the U.S. The introduction of small cap and value focused ETF’s like RPV and IWO expands the portfolios tilt toward value and small-cap stocks, potentially increasing return potential while mildly raising volatility. Other smaller ETF’s like IWN and SPGP were added, further increasing style diversity. Overall, these changed improve alignment with market opportunities – increasing growth exposure while maintaining value and income aspects via RPV, IWN and VTV. We are balancing a desire for higher returns through diversified factors, while ensuring risk is distributed across styles and geographies. Volatility remains controlled given the mix, and beta relative to the benchmark remains thoughtfully managed by blending core broad market ETF’s with growth and small-cap expansions.
LOOKING AHEAD
The push pull between a weaker labor force and higher inflation creates a host of challenges for the Fed. Thus, the Fed’s September 17th meeting will likely be the focus of marker participants for the month.
Lowering rates due to a weaking employment picture is not ideal, as the Fed would essentially be lowering rates not for good reasons, but because the labor market is showing signs of rapid deterioration. The focus on inflation will likely take second fiddle in the Fed’s decision, but they are still cognizant that tariffs may cause a temporary increase in prices. However, we will take a rate cut, which should benefit small companies more than large companies, given the former’s higher reliance on funding.
With earnings season behind us, fundamentals will not be in focus in September. But now that summer is over, and wall street is back to work, trading volume should improve, which has the potential to see shifts in institution’s asset allocation for the remainder of the year.
Overall, we are optimistic that the market can move through any near-term volatility. Coming off such a positive earnings season, in addition to a likely resumption in the Fed’s rate cutting cycle, should be supportive of current valuations.
The market has recently shown signs of broadening, which could be the catalyst for the next leg higher. Outside of the Mag 7, the other 493 stocks in the S&P 500 have some potential to play catch up, which would be a welcome change as we have begun to broaden our exposure to small and mid-caps, and value.
We will continue to monitor the markets each day and stand ready to adjust as we observe how the market responds to the upcoming events.
Enjoy the final weeks of summer.
