Market Commentary: Week of August 12, 2024

This past week, volatility remained high across most asset classes as stocks and bonds moved in opposite directions. Equities rebounded, retracing nearly 100% of the weakness that followed the weaker than expected unemployment report from the previous Friday. Bonds, in turn, gave back nearly 100% of the rally, ending this week very near the prior week's close as well. Concerns about the labor market were somewhat alleviated this week as a 17k decline in initial jobless claims abated the fears arising from the aforementioned Nonfarm Payrolls report. Cooler heads eventually prevailed as market hysteria (for lack of a better way of putting it) quieted down following some pundits calling for more immediate and aggressive intra-meeting rate cuts by the Fed. Furthermore, talk of recession risk was amplified as the hard-landing narrative started to become more vocally discussed. Many economists presently place the probability of the US falling into a recession between 15-45%.

Looking ahead to this week, we have the uncommon dynamic of PPI being released ahead of CPI, which will be closely watched for signs that inflation continues to drift lower. On Thursday, Retail Sales data may provide further clues as to the consumer's health, creating another potential market-moving event. The following week, we anticipate Powell’s speech at Jackson Hole to provide additional guidance regarding the Fed’s thoughts on policy and how they are managing their dual mandates of strong employment and price stability. The geopolitical environment and the rapidly approaching election in November could provide yet more fuel for market volatility as we move forward.

As evidenced in the above chart, the multi-month declining interest rate trend continued. However, the rapid pace of the decline that started two weeks ago was unexpected. The downward spike notably tested and supported two meaningful levels in rates on the 10-year Treasury. Selling into the strength of the market with expectations of the eventual retracement back to near the 4% level was a profitable move for many traders. Given the broader market narrative and expectations for Fed rate cuts, pullbacks that test the upper bounds of the existing trend should be strongly considered as buying opportunities for investors seeking to lock in attractive yields in a declining interest rate environment.

Following the previous week's aggressive buying spree by investors, including many SWBC portfolio manager clients, a more stable transactional environment was last week's norm. Looking ahead with a lighter new issue municipal calendar but August 15^th reinvestment money hitting accounts, I expect demand to remain steady as yields find their new trading range. As we move forward into September and October, the cyclical nature of the municipal market should be kept in mind. Specifically, during these months, municipals typically underperform and trade off relative to taxable markets, offering spread opportunities for prudent investors to optimize.

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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