GARDNER BROWN ASSOCIATES, INC.

MONTHLY MARKET INSIGHTS

Stocks notched modest gains in August, helping investors forget a volatile month of trading, punctuated by upbeat comments by Fed officials about interest rates.

The Dow Jones Industrial Average rose 1.76 percent, while the S&P 500 Index tacked on 2.28 percent. The Nasdaq Composite lagged a bit, advancing 0.65 percent.1

LAST MONTH

US Markets

Stocks notched modest gains in August, helping investors forget a volatile month of trading, punctuated by upbeat comments by Fed officials about interest rates.

The Dow Jones Industrial Average rose 1.76 percent, while the S&P 500 Index tacked on 2.28 percent. The Nasdaq Composite lagged a bit, advancing 0.65 percent.1

An Unsettling Jobs Report

August began with a disappointing employment report showing July job growth slowed much more than expected, and unemployment moved to 4.3 percent—the highest rate since October 2021. On the same day, Japan's Nikkei dropped quickly as investors cashed out of a popular trading strategy called a “carry trade,” which briefly pressured global financial markets.2,3

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Progress On Inflation

Almost as fast as markets fell, they bounced back, however. News that initial jobless claims fell more than expected—a positive sign for the labor markets—quieted some of the festering recession talk. Also, there was growing speculation that the July jobs report was more of an outlier that was perhaps influenced more than expected by Hurricane Beryl, which arrived in the U.S. in late June.4

Fresh economic data also bolstered investor confidence. The Producer Price Index and the Consumer Price Index rose less than expected in July, reinforcing the “cooling inflation” narrative. The July retail sales report was stronger than expected, which helped boost sentiment.5,6,7

Fed Officials Taking a Stand?

Despite mixed signals earlier this year, Fed officials now appear coordinated with their messaging about interest rates.

Constructive comments in the July Federal Open Market Committee meeting minutes showed policymakers were open to cutting short-term interest rates. A short time later, Fed Chair Jerome Powell, in his Jackson Hole symposium speech, indicated the time had come to adjust policy. And throughout the month, other Fed officials made speeches that suggested a rate change may be sooner rather than later.8

Sector Scorecard

Nine out of the 11 S&P 500 sectors finished the month higher. Consumer Staples (+5.99 percent) and Real Estate (+5.73 percent) led, with Financials (+4.57 percent), Utilities (+4.81 percent), and Health Care (+5.06 percent) not far behind.9

Industrials (+2.82 percent), Communication Services (+1.78 percent), and Materials (+2.32 percent) also posted solid gains. Technology lagged, climbing 0.70 percent. Energy (-2.07 percent) and Consumer Discretionary (-0.20 percent) fell for the month.9

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What Investors May Be Talking About in September

Expect attention to shift to the Fed’s next two-day meeting, which is scheduled to start on September 17.

Investors anticipate the Fed will follow up on its dovish talk in August with a rate adjustment at the conclusion of the Federal Open Market Committee (FOMC) meeting.10

Some still believe that the Fed may be reluctant to make any changes this close to the election, but most market observers seemed to dismiss that idea.10

“The time has come for policy to adjust,” Powell told a gathering of global central bankers in August at the Fed's annual Jackson Hole, Wyoming, conference. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

World Markets

The MSCI-EAFE Index gained 3.02 percent in August as markets rallied globally and central banks lowered rates.11

European stocks rallied, with Spain (+3.04 percent), Italy (+4.61 percent), Germany (+2.15 percent), France (+1.32 percent) and the United Kingdom (+1.13 percent) making solid advances.12

Pacific Rim markets were mixed. While China’s Hang Seng index picked up 3.72 percent, Japan’s Nikkei lost 1.16 percent. Japan’s Nikkei had an exceptionally volatile month as investors grappled with “carry trade” transactions, which is when speculators borrow money in a country with low interest rates and invest in currencies with a higher interest rate.13

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Indicators

Gross Domestic Product (GDP)

The economy grew 3.0 percent on an annualized basis in Q2, revised upward from the initial 2.8 percent estimate. GDP was more than doubled the first quarter’s 1.4 percent expansion.14

Employment

Employers added 114,000 jobs in July, fewer than economists expected. The unemployment rate moved higher to 4.3 percent, its highest level since October 2021. Average hourly earnings increased 3.6 percent year-over-year in July—the smallest wage gain since May 2021.15

Retail Sales

Spending rose in July by 1.0 percent month-over-month, led by an increase in auto sales. July’s gain exceeded the 0.3 percent economists expected.16

Industrial Production

Industrial output fell 0.6 percent in July, more than expected. It was the largest since January 2024, half of which came from the impacts of Hurricane Beryl on energy production.17

Housing

Housing starts fell 6.8 percent in July, impacted by high mortgage rates. The July number came in short of the number economists expected. Year over year, total starts fell 16 percent.18

Sales of previously owned homes rose 1.3 percent, slightly more than economists expected and a reversal after four consecutive months of declines. Improving inventory and falling mortgage rates contributed. The median for existing home sales price was up 4.2 percent year-over-year, to $422,600.19

New home sales rose 10.6 percent, with all four regions of the country seeing increases. The median new home sales price was $429,800.20

Consumer Price Index (CPI)

Consumer prices rose 0.2 percent in July on a month-over-month basis. Year-over-year prices increased 2.9 percent in July. It marked the first time the CPI fell below 3 percent since early 2021. Core inflation (CPI minus volatile food and energy prices) rose 3.2 percent in July, also a three-year low.21

Durable Goods Orders

New orders of manufactured goods designed to last three years or longer increased 9.9 percent in July, compared with June’s 6.9 percent decrease. Transportation drove the surge, without which new orders would have decreased by 0.2 percent.22

The Fed

While there was no formal policy meeting last month, Chair Powell’s speech at the Fed’s annual symposium in August provided some of the strongest hints yet on interest rates, saying, “The time has come for policy to adjust.”

Investors responded favorably, but many are still wondering about the Fed’s approach since Powell added that “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”23

The next scheduled two-day Fed meeting starts on September 17. It’s been 4.5 years—at the start of the pandemic—since the Fed last cut interest rates.24

MONTHLY QUOTE

"I don’t know that there are any shortcuts to doing a good job."

Sandra Day O’Connor, the first woman to serve as a U.S. Supreme Court justice