Summer is nearly over, and for many investors September can’t come quickly enough.
After surging nearly 10 percent in June and July, the Standard & Poor’s 500 index gave back more than half the gain over the past three straight losing weeks. Tech stocks have taken a painful hit: Tesla has tumbled 19 percent this month, Facebook parent Meta and Apple have lost more than 11 percent, and Netflix and Nvidia are down more than 7 percent.
The trouble spilled over from the bond market, which has been on a jag since April, when hopes that the Federal Reserve was near the end of its rate-hike campaign began to fade.
The investment return on US government bonds turned negative last week, according to Bloomberg’s Treasury index. The yield on the benchmark 10-year note hit 4.28 percent, a level not seen since 2008, while the rate on a 30-year fixed mortgage climbed back above 7 percent.
The August selloff in stocks paused on Monday, with the S&P 500 rebounding 0.7 percent and the Nasdaq Composite index rising 1.6 percent. The US bond continued to fall, driving 10-year yields to a 16-year high of 4.34 percent.
The main reason for the bad news in the markets is — stay with me here — good news on the economic front. The US economy has proven resilient despite the Fed’s aggressive campaign to cut inflation by ratcheting up borrowing costs for consumers and businesses.
Rather than the recession many forecasters said was likely, the economy expanded by about 2 percent in the first half of the year. That’s a bit higher than the central bank’s estimate of peak sustainable growth.
Employers are still hiring at a healthy clip, pushing unemployment back to a near five-decade low. And inflation has slowed to an average of 3.4 percent over the past three months, down from a peak of 9.1 percent in June 2022.
“The economy’s recent performance could not be much better,” Mark Zandi, chief economist at Moody’s Analytics, said in a note to clients last week.
Many investors had bet that the Fed would begin cutting interest rates later this year. That would have increased the value of their holdings as yields fell.
Now most think that with the economy outperforming, policy makers will keep interest rates “higher for longer” than previously expected to make sure that inflation continues to decline to their 2 percent target. Their hopes dashed, investors have bailed on bonds, sending prices lower and yields — which move in the opposite direction — higher.
As we saw last year, stock investors dislike higher interest rates, which make newly issued bonds more attractive and hinder corporate profit growth. Yields topping 5 percent on money market mutual funds and bank certificates of deposits are also sucking money out of stocks.
Investors are also reacting to a sharp slowdown in China, where the end of the government’s “zero-COVID” policy has not sparked the boom the government had expected.
Instead, companies and municipalities are drowning in debt, the hangover from the decadeslong spending binge that made China’s economy the second largest in the world. The country’s real estate bubble burst. And consumers are hunkering down.
These woes are a mixed blessing for Western countries, whose economies are intertwined with China’s. Goods imported from China should get cheaper, easing inflationary pressure here. But exports to China — including commodities, aircraft, and chemicals — could suffer as consumer and business demand wanes, and that would weigh on global growth.
Finally, stocks and bonds are feeling the effect from the ballooning US budget deficit. Some money that might normally go into equities is winding up in Treasuries as the government is forced to offer higher yields to attract investors.
Now, all eyes are on Fed chair Jerome Powell, who will speak on Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.
Investors are hoping Powell will signal that the Fed could start reducing rates in the first half of next year — but those hopes have been dashed before.