Equity markets go to extremes but come out ahead

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September 11, 2024

7 MIN READ

Summary

Global equity markets recorded positive returns in August amid periods of volatility, particularly at the beginning and end of the month. Developed stock markets outperformed their emerging-market counterparts. The markets slumped in early August on growing recession worries due to relatively weak U.S. economic data and the Federal Reserve’s (Fed) decision not to cut the federal-funds rate following its meeting at the end of July. Stock prices subsequently rallied as investors were encouraged by several positive economic data reports, which boosted optimism that the Federal Reserve (Fed) remains on schedule to cut interest rates in September.
Global fixed-income assets posted gains in August. U.S. Treasury yields moved lower across the curve. (Bond prices move inversely to yields.)
We continue to expect that the global economy will avoid recession in the near term, and we remain focused on longer-term trends as opposed to shorter-term variations in the economic data.

Global equity markets recorded positive returns in August amid periods of volatility, particularly at the beginning and end of the month. Developed stock markets outperformed their emerging-market counterparts. The markets slumped in early August on growing recession worries due to relatively weak U.S. economic data and the Fed’s decision not to cut the federal-funds rate following its meeting at the end of July. Additionally, the PHLX Semiconductor Sector Index™, which tracks the performance of the 30 largest U.S.-listed semiconductor companies, fell more than 7% on August 1—its worst one-day percentage decline since March 2020—after Arm Holdings, a U.K.-based chipmaker, issued disappointing earnings guidance for the remaining three quarters of its 2025 fiscal year. This led to concerns that significant spending on artificial intelligence (AI) computing will not benefit several U.S.-based mega-cap companies as much as previously expected. Stock prices subsequently rallied later in the month as investors were encouraged by relatively weaker labor market data and signs of slowing inflation, which boosted optimism that Fed remains on schedule to cut interest rates in September.

The Nordic countries were the strongest performers among developed markets in August, led by Finland and Sweden. Europe also performed well due mainly to strength in Spain, Italy, and Switzerland. The Far East registered a relatively smaller gain and was the primary market laggard, attributable largely to underperformance in Japan. The Association of Southeast Asian Nations (ASEAN) comprised the top-performing emerging market in August, bolstered mainly by strength in the Philippines, Indonesia, and Malaysia. Conversely, the Latin America ex Brazil and Europe regions were the weakest emerging-market performers for the month, hampered primarily by weakness in Mexico and Turkey, respectively.¹

Global fixed-income assets, as measured by the Bloomberg Global Aggregate Bond Index, gained 1.4% in August. High-yield bonds were the strongest performers within the U.S. fixed-income market, followed by mortgage-backed securities (MBS), investment-grade corporate bonds, and U.S. Treasury securities. Treasury yields moved lower across the curve. Yields on 2-, 3-, 5- and 10-year Treasury notes fell by corresponding margins of 0.38%, 0.31%, 0.26%, and 0.18%, ending the month at 3.91%, 3.79%, 3.71%, and 3.91%, respectively.² The spread between 10- and 2-year notes narrowed 20 basis points in August, resulting in a flat yield curve (which occurs when there is little or no difference between 10- and 2-year yields) at month-end—marking the first time in more than two years that the yield curve was not inverted at the market’s close. A flat yield curve generally is viewed as a sign of uncertainty about future economic growth.

¹ All equity market performance statements are based on the MSCI ACWI Index.

² According to the U.S. Department of the Treasury. As of August 30, 2024.

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Glossary of financial terms

The federal-funds rate is the interest rate charged to lending institutions on unsecured overnight loans. It is set by the U.S. Federal Reserve’s Federal Open Market Committee. The rate is increased when the Federal Reserve wants to discourage borrowing and slow the economy and decreased when the Federal Reserve wants to spur economic growth.

Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value, or face value.

Yield curve represents differences in yields across a range of maturities of bonds of the same issuer or credit rating (are (which is used to assess the risk of default of companies or countries). A steeper yield curve represents a greater difference between the yields. A flatter curve indicates that short- and long-term yields are closer together.

A flat yield curve occurs when there is little or no spread between short- and long-term yields. A flat yield curve generally is viewed as a sign of uncertainty about future economic growth.

An inverted yield curve occurs when short-term yields exceed long-term yields. While an inverted yield curve historically has predicted economic recessions, it is an indicator—not a forecast.

Monetary policy refers to decisions by central banks to influence the amount of money and credit in the economy by managing the level of benchmark interest rates and the purchase or sale of securities. Central banks typically make policy decisions based on their mandates to target specific levels or ranges for inflation and employment.

Index descriptions

All indexes are quoted in gross performance unless otherwise indicated.

The PHLX Semiconductor Sector Index™ tracks the performance of the 30 largest U.S.-listed semiconductor companies.

The MSCI ACWI Index is a market capitalization-weighted index that tracks the performance of over 2,000 companies, and is representative of the market structure of 48 developed and emerging-market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars.

The Bloomberg Global Aggregate Bond Index is a market capitalization-weighted index that tracks the performance of investment-grade (rated BBB- or higher by S&P Global Ratings/Fitch Ratings or Baa3 or higher by Moody’s Investors Service) fixed-income securities denominated in 13 currencies. The index reflects reinvestment of all distributions and changes in market prices.

The Bloomberg US High Yield Index tracks the performance of fixed-rate, publicly issued, non-investment-grade (rated BB+ or lower by S&P Global Ratings and Fitch Ratings or Ba1 or lower by Moody’s Investors Service) bonds.

The Bloomberg US Treasury Index tracks the performance of fixed-rate, nominal debt issued by the US Treasury.

The Bloomberg US Mortgage Backed Securities Index tracks the performance of fixed-rate agency mortgage-backed securities (MBS) guaranteed by the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and Freddie Mac (FHLMC).

The Bloomberg US Corporate Investment Grade Index tracks the performance of the investment-grade, fixed-rate, taxable corporate bond market.

The Bloomberg Commodity Total Return Index comprises futures contracts and tracks the performance of a fully collateralized investment in the index. This combines the returns of the index with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury bills.

Consumer-price indexes measure changes in the price level of a weighted-average market basket of consumer goods and services purchased by households. A consumer price index is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding SEI’s portfolios or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. It is intended for educational purposes only.

There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.

Diversification may not protect against market risk. Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).