August 2020 proved to be a quiet, grinding summer month for markets highlighted by the ever-evolving political landscape and some new long-term inflation guidelines from the Fed.
Politics played a large part in the macro backdrop throughout the month as promises of another coronavirus related stimulus package came and went. Progress seemed to halt as the Democratic and Republican National Convention’s took center stage; and the month ended with no bipartisan compromise.
On August 7th, monthly employment figures came in much stronger than expectations. +1,736k non-farm payrolls were added and the unemployment rate fell to 10.2% (previously 11.1%). Housing starts grew by +22.6% in July, existing-home sales grew by a staggering +24.7% month-over-month, and new home sales jumped by +13.9% as low rates and urban outflows continue to drive homeownership. Retail sales and durable goods were also strong, but consumer confidence numbers are starting to slide as initial stimulus assistance is beginning to dwindle.
Despite some COVID-19 spikes, news of late-stage vaccine progress and rapid testing gave investors some hope. On August 11th, markets reacted briefly to a report that Russia had approved a vaccine that would start being distributed. While the Russia story was quickly debunked by the media, major drug companies started to release news on drug progress and milestones.
Mid-month, the Fed took a step back from the idea of controlling the yield curve and began to float the idea of changing inflation targets. On August 27th, at the annual Jackson Hole Economic Policy Symposium, the Fed announced a plan to adopt more flexible average inflation targeting into their framework which would allow inflation to run moderately higher than 2%. This change would allow the Fed to keep rates lower for even longer as the economy and inflation begin to heat up. This news provided a boost to risk markets and solidified the steeper yield curve trend. (Low rates are likely to stay low, while longer, more inflationary and economic sensitive longer rates should move higher as inflation rises.)
Equity markets continued to move higher on the back of generally positive earnings. Technology, health-care and the industrial sectors continued to lead the way. The S&P 500 Index rose +7.19%, the biggest August increase since 1986. Global stocks also rallied, the MSCI World ex USA Index rose +4.31%.
Oil prices rallied as a result of both production cuts and storm shutdowns in the gulf (WTI +5.03%).
Gold took a break after strong July performance, while it reached $2,063.54 on August 6th, it ended the month slightly down (spot gold -0.41% for the month). Commodity bulls continue to emerge as the US dollar hit a two-year low ending 1.194 versus the Euro.
The Bloomberg Barclays Aggregate Bond Index was -0.81% for the month. Longer maturities fell as rates rose and the U.S. yield curve showed signs of a “steepening trend”. Investment-grade corporate bonds and high-grade municipal bonds also fell, most prominently in long-duration securities.
The Piton team continues to focus on constructing quality portfolios designed to perform over the long-term with a lower standard deviation than many prevailing bond funds, ETF’s and fixed income strategies.
Despite our outlook for a low rate environment for the foreseeable future, we view keeping lower interest rate risk in our portfolios as the right course of action. As the Fed continues to pump liquidity into the markets, they have steered away from the prospect of negative interest rates in the US. In our view, this creates asymmetric risk in long-term strategies for safe bond portfolios. As the election approaches in the US, we view conservative bond portfolios as an essential portion of all asset allocations despite the current low-rate environment.
Please reach out to us at 646-518-2800 to review your current fixed income portfolio, the current market environment or to receive additional detail on how Piton can help meet your needs.