MONTH IN REVIEW

August was another positive month for key indices as small caps led the way.

Equities continued to rally in August for a fourth straight month.  Some of the key drivers for the continued rise in asset prices included stronger than expected corporate earnings, rising odds of future and multiple interest rate cuts, and moderating inflation.  Following a return of 2.24% in July (total return), SPX (the S&P 500) returned 2.03% (total return) in August.  After returning 2.41% (total return) in July, NDX (the Nasdaq-100) returned 0.92% (total return) in August.  The Russell 2000 returned 7.14% in August after a gain of 1.73% in July.  SPX & NDX held their key moving averages in August, which we will illustrate later in this note. 

High Yield & Real Estate both rallied in August, while Bitcoin fell.  Following a return of 0.45% in July (total return), High Yield (Bloomberg US Corporate High Yield Total Return Index) returned 1.25% (total return) in August.  Following a return of 0.16% in July (total return), Real Estate (Dow Jones US Real Estate Capped Index) returned 2.91% (total return) in August.  Bitcoin returned -7.23% in August (Bloomberg Bitcoin Index) after an 8.54% gain in July.  Despite giving back most of its July gains in August, Bitcoin has gained roughly 16% YTD.

Shorter-term Treasuries rallied in August as core inflation ticked lower and the Fed signaled a new cutting cycle is on the horizon starting in September.  The long-end of the curve underperformed.  The 10-yr closed at 4.22% to end the month, near the lower end of its important 4.20% – 4.50% technical range.  The 30-year Treasury yield ended the month at roughly 4.89%, roughly unchanged month-over-month.  Over the past several months and years, the correlation between equities and fixed income has been notably high – and likely will remain so.  Additionally, the 2/10 Treasury yield spread remained positive and steepened again in August after its record-long inversion came to an end in the second half of 2024.

Another notable datapoint from July was the release of July’s inflation data: Core CPI printed 0.2% M/M, matching the consensus.  PPI printed 0.9% M/M, well above the 0.2% consensus.  PCE printed 0.2%, matching the consensus.  Core PCE printed 0.3%, also matching the consensus.

The next Fed meeting will take place on 9/16-9/17, and there is a 25bps cut expected.  Looking forward, and as of the end of August, the market is pricing in a total of 50bps of cuts for the remainder of 2025 (two cuts), and 75bps in 2026 (three cuts).  The Fed continues to target 2% inflation as its goal, and incoming inflation reports will likely continue to drive the dot plot.  However, the Fed has signaled that it is ready to start cutting rates despite inflation remaining stuck above the 2% target.  Furthermore, the weaking employment picture will likely play a major role in future cuts.

According to FactSet, the trailing 12-month P/E ratio for SPX is 27.9, which is above the 5-year average (25.0), and above the 10-year average (22.6).  The forward 12-month P/E ratio for SPX is 22.4, which is above the 5-year average (19.9), and above the 10-year average (18.4).  Additionally, per FactSet, SPX is reporting Y/Y revenue growth of 6.4% for Q2 2025, which is above the estimate of 4.2% on June 30.  Finally, per FactSet, SPX is reporting Y/Y earnings growth of 11.9% for Q2 2025, which is above the estimate of 4.8% on June 30. 

Within commodities and currencies: WTI Crude Oil fell in August by roughly 6% to close near $64/bl.  Gold rose by 4.80% in August to close near $3,500/oz.  Finally, the USD/DXY fell in August and closed out the month near 97.75.  2025 has been one the weakest starts to a year for the USD in several decades.

VOLATILITY UPDATE

After closing out July near 16.75, the VIX Index closed out August near 15.50 as volatility remained subdued.  At the start of August, the VIX briefly rose over 20 before falling steadily from there.  The 12-month high of the VIX Index was registered on 4/7/25 at 60.13.  In 2022, the VIX averaged over 25.  In 2023, the VIX averaged near 17.  And in 2024, the VIX averaged near 15.50.

The MOVE Index calculates the future volatility of US Treasury yields implied by current prices of options on Treasuries of various maturities.  It is thought of as “The VIX Index of the Bond Market.“   After closing out July near 80, the MOVE Index closed out August nearly unchanged M/M.  Traders will continue to monitor this index to gauge potential future bond and equity volatility.  Equities tend to favor a subdued MOVE Index – and a low MOVE Index has been the case over the past 4 months.

NOTABLE CHARTS

LOOKING AHEAD

Among other factors, the market will be adjusting to and watching US trade policy developments, inflation, earnings, yields, and fiscal policy.  On the inflation front, August’s PPI will be released on 9/10, and CPI will be released on 9/11.  Finally, the next FOMC meeting will take place on 9/16-9/17, and the market is expecting a 25bps cut.