Market Update

August slipped away like a moment in time. Summer went by in a flash – and not without some excitement. We saw the S&P 500 hit its 38th all-time high in July (marking a 19% return on the year) before a -8.5% pullback in August. The whiplash was short-lived, however, as stocks quickly recovered and now sit just 1% from all-time highs. Outside of stocks, perhaps the most important news of the summer for investors is that the Federal Reserve is (finally) prepared to cut rates.

In this edition of Top Market Takeaways, we are highlighting three moments that defined August as we prepare for the upcoming rate-cutting cycle.

3 moments that defined August

1. The unemployment rate rose. The July labor market report, released on August 2, undershot expectations across nearly every metric. Notably, the unemployment rate rose to 4.3% from 4.1% in June, triggering the ominous “Sahm Rule,” which often coincides with recessions. Global risk assets suffered in the days following the release and the unwind of popular “carry trades” further exacerbated the moves.

The CBOE Volatility Index (VIX), a measure of implied S&P 500 volatility, spiked to levels seen only during the onset of the COVID-19 pandemic and the throes of the Global Financial Crisis. Stocks around the world slid while core bonds, demonstrating their defensive characteristics, rallied.

The July labor market data made one thing clear: The health of the labor market is a bigger concern than inflation. This, plus a sell-off in risk assets, sent a clear message to the Fed: It’s best not to “mess around and find out” what further weakness could look like or lead to in either the markets or the economy.

2. Investors bought the dip. Using stock market pullbacks to increase equity exposure can be a powerful strategy, especially for those sitting on the sideline with excess cash positions. August’s drawdown was about -8.5% from July highs and since the lows, the S&P 500 is up 7.5% – not too shabby. In fact, average returns for the S&P 500 12 months after a 5% pullback are nearly 12%, and markets are higher almost 75% of the time.

This time around, it seems like investors did their homework. Active trading on our platform increased by 55% during the August sell-off and over 70% of the action was to buy equities.

Strong fundamentals helped make the case to buy the dip.

• The S&P 500 is on pace to have its best earnings season since the first quarter of 2022 – growing profits about 12% over the prior year. While big tech has driven a lot of the growth thus far (19%), a broadening has simultaneously taken shape. Seven of the 11 sectors have exceeded analyst expectations.
• Even more important? Those earnings are higher quality. Profit margins (which show how much profit a company makes from each dollar of sales after all expenses are deducted) are around 10.5% for the quarter so far. That’s a slight increase from last quarter and above the five-year average.

We believe the bull market has room to run. In fact, the median bull market lasts 46 months (about three times longer than the average bear market). The S&P 500’s current bull run, by comparison, is only 22 months young. If it were to merely meet the historical median, that would mean this bull run could extend for two more years.

3. The Fed signaled that cuts are here. Federal Reserve Chair Jerome Powell said it himself at last week’s Jackson Hole symposium: “The time has come for policy to adjust.” While the pace and magnitude may vary, the direction is clear: Policy rates are heading lower. Rate cuts ought to support the economy and the labor market by incentivizing more activity in areas like housing, autos and capital markets.

If there is one thing investors should know from past rate cutting cycles, it is that cash is likely to underperform as yields fall. Cash has played a noble role in portfolios over the last two years and is a necessary part of any lifestyle. But even if policy rates settle in a higher range than the last cycle, today’s elevated cash yields won’t last forever.

We believe better opportunities outside of cash exist today, especially for long-term investors looking to grow and compound their wealth over time. Bonds, for example, may provide consistent income and downside protection while equities may stand to provide long-term capital appreciation.

Despite the uncertainty, we continue to believe that the cycle should power through a soft labor market, the stock market could have plenty of room to run and investors should assess their cash positions as the Fed prepares to cut interest rates.

As always, your J.P. Morgan advisor is here to help you think through what this may mean for your portfolio.

All market and economic data as of 08/29/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.

Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).

Diversification and asset allocation does not ensure a profit or protect against loss.

Index definitions:

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
• When investing in mutual funds or exchange-traded and index funds, please consider the investment objectives, risks, charges, and expenses associated with the funds before investing. You may obtain a fund’s prospectus by contacting your investment professional. The prospectus contains information, which should be carefully read before investing.
• Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
• International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the u.s. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in international markets can be more volatile.
• Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the u.s. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in emerging markets can be more volatile.
• Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
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• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
• For informational purposes only -- J.P. Morgan Securities LLC does not endorse, advise on, transmit, sell or transact in any type of virtual currency. Please note: J.P. Morgan Securities LLC does not intermediate, mine, transmit, custody, store, sell, exchange, control, administer, or issue any type of virtual currency, which includes any type of digital unit used as a medium of exchange or a form of digitally stored value.
• The prices and rates of return are indicative, as they may vary over time based on market conditions.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.