The S&P 500 notched its seventh consecutive monthly gain in August and its best return since April with a strong return of 3.04%. The summer of large growth outperformance continued, with the tech-heavy asset class gaining 4.18%. All five of the S&P 500’s most heavily weighted companies gained more than 4%. Other asset classes fared well, too, with mid-caps gaining 1.91%, small caps gaining 2.02% and international developed and emerging markets gaining 1.76% and 2.62%, respectively. The Bloomberg Barclays Aggregate Bond Index gave back a little bit of its recent gains during August, losing 0.19%, due to a slight uptick in interest rates. The yield on the 10-year US Treasury closed July at 1.24% and rose to 1.30% during August. The leading sector in August was Financials, which gained 5.14% due largely to the benefit banks see from rising interest rates. Energy was the worst performing sector with a 2.04% loss; the price of a barrel of WTI Crude Oil fell by more than 16% at one point during August to $62.11 due to fears of Covid’s Delta variant slowing down the economic recovery as well as the Biden administration’s request to OPEC to increase production. Oil prices rebounded later in the month as fears of Delta-related shutdowns subsided and the threat of Hurricane Ida to the Gulf of Mexico’s oil production and refining capacity stoked concerns about supply.

When August began, market watchers were pointing to concerns around the threat imposed by the spreading Delta variant and the Fed’s tapering of asset purchases. Fears that the economic recovery was losing steam were supported by a 13-month low in July for homebuilder confidence (as measured by the Wells Fargo Housing Market Index) as well as a surprisingly big decline in consumer sentiment on August 13^th (as measured by the University of Michigan’s Survey of Consumers). While markets didn’t completely shrug off these indicators—the S&P 500 experienced a two-day loss of 1.62% on August 17-18—it appears that investors are satisfied that economic growth is still robust enough to support market optimism. After all, there was plenty of good in August’s economic news. The jobs report released on August 6^th exceeded expectations, with 943,000 non-farm payroll jobs added in July compared with a forecasted 870,000. This pushed the unemployment rate down from 5.9% to 5.4%. Average hourly earnings saw a year over year growth rate of 4% in July, compared with a forecast of 3.8%. Arguably the best economic development, though, was the absence of new Covid-related restrictions on businesses. There is a growing sense that there will not be additional lockdown measures in the U.S., even with the damage Delta is wreaking, primarily on the unvaccinated portion of the population. One might argue that new mask guidance and mandates are restrictive in the sense that people are sick of doing it, but new masking rules have little negative impact on economic activity, if any.

The other main focal point, the Fed and its forward guidance on its asset purchasing program, did not give the market much heartburn either. Although Fed Chair Jerome Powell did say on August 27^th that “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace” of the Fed’s $120 million in monthly asset purchases later this year, investors appear to be comfortable with that timeline—the S&P 500 had its best day in over a month on the day of Powell’s remarks.

August also witnessed dramatic events in Afghanistan. The final withdrawal of U.S. troops coincided with sweeping gains by the Taliban across the country, culminating in their occupation of Kabul, the collapse of the U.S.-trained Afghani army, the flight of the U.S.-supported Afghani government and the chaotic scramble to evacuate Americans and allies before the August 31 withdrawal deadline. These developments, though tragic, are not expected to have meaningful consequences for traditional U.S. based investors; we caution our readers against reacting to the news in Afghanistan with investment decisions.

It will be interesting to see how certain things in the economy pan out over the next few months. First, the Pfizer vaccine gained full FDA approval in August—this has been the milestone on which a significant portion of the unvaccinated have claimed to be waiting before getting the shot themselves. If vaccination rates indeed begin to pick up in the wake of this news, that will be a bullish indicator that the end of the pandemic is getting closer. Additionally, the federal subsidies to unemployment insurance are expected to expire this Friday, September 4^th. That, combined with school reopening putting less strain on parents, may compel and/or induce a large swath of the unemployed back into the labor market to fill the country’s record-high job openings. The Consumer Price Index notched a second consecutive month of 5.4% year over year increases. Investors and consumers, not to mention the Fed, will be watching in anticipation of cooling inflation numbers. Another potential threat to the economy and markets is the looming fight over the debt ceiling. Congress will need to pass legislation funding the federal government past September 30^th, although investors have seemed indifferent to this happening during the three shutdowns of the past decade.

The S&P 500 has gained 21.58% through the first two thirds of the year, and there is a sense of resiliency in the market. In the classic diagram showing the “cycle of market emotions” we are without a doubt in the upsloping stage of optimism, excitement and thrill, if not euphoria. While we continue to feel that market conditions generally support continued growth, we believe it is imperative for investors to remain grounded in their approach and their expectations. If bear markets were easily anticipated, we would never have them. Investors should act accordingly and continue to review their portfolio’s risk exposure vis-à-vis their risk tolerance.

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