Market Update: August returns (including dividends)

August Returns (including dividends):

S&P 500:  2.7%

S&P 500 Equal-Weight: 2.1%

Dow Jones:  1.5%

Nasdaq: 3.9%

MSCI EAFE:  2.0%

MSCI Emerging Markets: 3.4%

Bonds (US Aggregate):  0.4%

 Economic & Policy Highlights

Interest Rates & Fed Outlook

• No major Central Banks met during the month of August
• The Bank of Japan spent $96 Billion in August trying to defend the Yen and still failed to stop its decline

Employment & Growth

• US interest expense is now larger than military spending
• The outlook for US housing continued to weaken
• US employment statistics remained stable
• Negative sentiment towards US data centre construction surged
• China introduced 40-year mortgages to halt a 5-year slide in real estate
• China saw a record drop in demand for loans

Consumer spending & sentiment

• 30-year mortgage rates hit 6.8%, a 1 year high
• Consumer sentiment fell to a 7-month low
• The US savings rate fell to 2.7% as Americans used credit cards and savings to maintain spending levels

Trade

• The US announced a ban on Chinese data center components
• The US imposed 100% tariffs on drones and drone parts
• Canada rejected a US tariff trade deal

Geopolitical Volatility & Energy

• The US announced a plan to ramp up the economic isolation of Iran
• US began talks to take a major stake in Venezuelan oilfields
• The Houthis attacked a Saudi super tanker in the Red Sea
• The price of oil rose 1.3% as hostilities continued in the Strait of Hormuz
• The US Strategic Petroleum Reserves fell below 290 million barrels, first time since 1982
• Gasoline and diesel prices approached seasonal and record highs as US inventories continued to fall, despite refineries running at 100% utilization rates
• Gold rose 9.7%, as central banks reportedly bought 289 tonnes in the second quarter. Gold was also supported as the debasement trade re-emerged

Summary Impact

• US national debt hit $40 Trillion, interest payments on the debt will hit $1.25 Trillion in 2026
• The debasement trade re-emerged as Scott Bessent, US Treasury Secretary announced a plan to buy back long dated treasury bonds in a veiled attempt to cap interest rates. Bond and currency markets responded negatively to this “Fiscal Dominance”
• China refused to stop cooperating with Iran, despite US demands
• The US Treasury issued 30-year bonds with a yield of 5.21%, the highest since 2001

Commentary:

Global equities regained their footing in August as the second quarter earnings season came to an end, with technology and energy stocks posting good growth.  Emerging markets did slightly better than developed markets, largely driven by a weaker US dollar.  Perhaps of greater interest was the fact that both growth stocks and value stocks were up the same amount.  Growth stocks were helped by a recovery in semiconductor shares, after July’s pummeling, but the real story was the bounce in software stocks.  On the value front, commodity related shares such as energy, industrial metals, precious metals and agriculture all rallied in August (likely not good news for inflation).

“The long-term Treasury yield is the most important price in the world [and] the only fiscal disciplinarian the U.S. has left”

• Stanley Druckenmiller, renowned hedge fund manager

This quote was part of a very public criticism of Treasury Secretary, Scott Bessent’s attempt to browbeat long-term rates lower with proposed buybacks and possibly other types of government intervention.  We agree with Mr. Druckenmiller’s assertion and point out that Bessent’s plan is merely a Band-Aid on a deep cut, while working against what Fed Chair Kevin Warsh is trying to accomplish.  The only real solution to rising government bond yields is deficit reduction, something neither side of the aisle is willing to address.

August action in the bond market was slightly positive with short-term yields drifting higher on inflation worries, as long-term bond prices came off their lows on US Treasury promised buybacks.  Bonds in continental Europe fell while Emerging market bonds rose, helped by the weaker US Dollar.  Overall credit spreads were stable but the deluge of new bond issuance awaiting in September will likely result in rates and spreads moving higher as demand for credit and wariness of long-term inflation, pressure yields upwards.

Markets have chosen to grind forward this year, even as each underpinning of the stock market’s bull thesis slowly gives way.    At the beginning of the year the bull thesis on stocks consisted of earnings growth, falling interest rates, lower inflation, consumer spending, bigger tax refunds, the war would be over in a few weeks and the Republican’s control over government would remain intact.  As we enter September, only earnings growth remains out of the original thesis.  This earnings growth is heavily dependent on AI’s successful rapid buildout, adoption, and profitability.  This will require cheap available capital and energy production (electricity) which lags current demand forecasts.  While we believe AI will be transformational, it is not without its risks, as there is a series of headwinds growing in intensity that could disrupt AI’s trajectory.  The primary risk is the growing public backlash against AI data centers with 75% of Democrats and 63% of Republicans against one being built in their area (Reuters/Ipsos poll).  To put this into perspective, only 50% of Americans are against building a nuclear power plant in their area.   A secondary risk is the rising cost of capital to build out the AI infrastructure.  Finally, the social and environmental impacts of AI are in their infancy but are clearly not without potential negative outcomes.  We believe the road for equities from here becomes bumpier and the margin for error becomes less.  We remain cautious and focused on protecting capital, while not overpaying for growth.