August saw significant up and downs in stock returns. In the first half of the month a global stock portfolio was up about 3%, then dropped 6% to a loss of almost 3% after Fed Chairman Powell publicly reaffirm its commitment to increasing interest rates until inflation is in check. Domestic large cap equities were down over 4% – Google was down almost 18% – small company stocks off 2%. While emerging markets were up a scratch, stocks traded in international developed markets were down nearly 5%. The variability of returns among markets as well as the volatility in the August numbers reflects the continued uncertainty associated with the Fed wringing out inflation while avoiding a recession. Expect this unpredictability of stock markets to continue.
Bond yields ratcheted up about 0.5% across most maturities in August. The yield on the Bell weather 10-year Treasuries climbed 0.4% to 3.1%. This nearly parallel upward shift in yields drove this month’s bond returns from losses of about 1% to almost 4% depending on maturity. Yields on both nominal and inflation protect Treasuries for 5 and 10-year maturities jumped about 0.5% in August maintaining a difference of about 2.5%, which is a reasonable measure of expected inflation over five and ten-year periods. Additionally, the shape of the Yield curved became even more inverted (1-year yields of 3.5% versus 10-year yields of 3.1%) in August. A yield curve of this shape is oftentimes associated with a recession down the road.
So, signals from the bond market are a mixed bag – the shape of the yield curve indicates a recession ahead: the spread between nominal and real (inflation adjusted) 5 and 10-year yields shows expected inflation in line with the Fed’s targets. We’ll see.