In the first half of the month, share prices moved higher on the back of investor optimism and solid earnings, with the S&P 500 Index stringing together its longest streak of weekly gains in over a year. However, in the second half of August, markets gave back their gains as investor confidence waned.
The best-performing sector for the month was energy, which delivered high returns on the back of surging natural gas prices. Utilities, which are generating strong profits in the current energy environment, also did well compared with broad indices.
One of the main drivers of the stock market weakness in the second half of the month was Federal Reserve Chair Jerome Powell’s speech at Jackson Hole on August 26th. Going into the economic conference, investors were hoping that the Fed might signal that it would take a softer stance towards interest rate hikes going forward. However, Powell took a tough stance on monetary policy, stating that the central bank will not stop increasing interest rates until inflation (which came in at 8.5% in the US in July) is under control. This disappointed investors, sparking a 1,000 point sell-off in the Dow Jones.
During August, US President Joe Biden signed the Inflation Reduction Act — a major climate change and healthcare bill — into law.
This Act is designed to curb inflation by lowering prescription drug and healthcare costs, and promoting clean energy. It represents the largest climate investment in American history. Meanwhile, Biden also signed the CHIPS and Science Act, also known as just the “CHIPS Act.”. This is a historic bill that will channel $53 billion towards domestic semiconductor manufacturing. The aim is to strengthen US chip research and manufacturing, supply chains, and national security, and ensure that America remains a leader in the industries of tomorrow, such as nanotechnology, quantum computing, and artificial intelligence. It’s worth noting that this wasn’t the only big semiconductor-related news during August. Early in the month, US House of Representatives speaker Nancy Pelosi visited Taiwan — which manufactures around 90% of the world’s chips today — to discuss the CHIPS Act.
In the bonds markets, the US 10-year Treasury yield ended the month near 3.2%, up from around 2.6% at the beginning of the month. Interestingly, the 2-year Treasury yield exceeded the 10-year yield by nearly 50 basis points during the month, a milestone last seen in August 2000. The curve inversion is a sign that the market believes the Fed’s interest rates increases will lead to a recession.
In commodities, it was another strong month for natural gas.
With winter not far off now, Germany has been boosting its gas inventories. However, its stockpiles are not enough to cover the full winter, meaning that the country is in danger of running out of gas if Russia decides to halt flows. The gas shortage situation across Europe is so worrying that the UK has been importing gas from far-off Australia. Oil prices dipped slightly in August, however, this didn’t stop oil giant Saudi Aramco from posting strong results. It generated the biggest quarterly adjusted profit of any listed company globally, driven by high crude prices and production.
Turning to crypto, it was another volatile month.
During the first half of August, when investors were in “risk-on” mode, Bitcoin rose to nearly $25,000. However, when investors went back into “risk-off” mode after Powell’s speech, the cryptoasset pulled back sharply, and ended the month near $20,000. Elsewhere in the crypto space, traders were a little cautious of Ethereum ahead of its upcoming software upgrade, which is set to take place in September.