What happened last week
- Price action: Summer liquidity, poor economic data, a less dovish than desired Fed, and positioning all contributed to a broad-based decline in equities and Treasury yields last week that is continuing today.
- Earnings: Although corporate fundamentals remain solid, the high bar set by investors proved too high a hurdle for companies to clear.
- Fed: Powell was dovish and asked for patience, but the market wants quicker action as calls of a policy error grow.
What we’re watching this week
- Fedspeak: This is arguably the most important barometer right now; how quickly do they pivot and ratify what the market has already decided?
- Price action: Sentiment and liquidity are very poor; can we find some stability after a wild four weeks of trading?
- Labor data: The labor market is a key focus for investors, and traders will be closely parsing this week’s updates.
Horizon’s Investment Management Views
Investors got what they have been asking for over the past two years – a steep fall in interest rates – yet the bulls were left with little to cheer about as global equity indices declined. As we have long maintained, the “why” behind interest rate moves matters more than most appreciate. The 50-basis-point plunge in the 2-year yield last week, its steepest decline since the regional banking woes of March 2023, came for the wrong reason – cracks in the labor market are widening, and investors are worried about economic growth. Therefore, growth concerns outweighed the move lower in rates for the cyclical rate beneficiaries like small-caps and regional banks, causing them to materially underperform large-caps. Meanwhile, investors sought shelter in the acyclical rate-sensitive equities; staples, healthcare, utilities, and real estate were all positive week over week. Positioning, already a thorn in market sentiment after the inflation-induced rotation in mid-July, and poor late-summer liquidity exacerbated last week’s price action and led to a sharp spike in the Volatility Index (VIX). This action is continuing early in Monday’s trading session.
Now that we are through the bulk of earnings season, our broad conclusion is that companies across the globe are failing to live up to the high bar set by the market. Results are still very solid, and guidance remains constructive; we are not concerned about company fundamentals. But less than superb earnings releases coupled with growing calls that the Fed is behind the curve, yet again, were enough to seriously degrade investor sentiment last week.
Last but not least, the Fed. Chair Powell leaned dovish in the press conference, reiterating that the next move is a cut and that the labor side of their dual mandate is gaining importance in their thinking about policy. But Powell asked for patience, and the market was having none of it. One can’t help but wonder how much different last week would have gone if the non-farm jobs report had been released the prior week.
VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange’s CBOE Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.
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