The S&P 500® Index returned -4.08% in August, bringing its year-to-date return to -16.14%. After a 22.99% drawdown from January 4 through June 16, the S&P 500® Index climbed 17.68% from June 16 through August 16. The continuation of the rally in August was driven by a resilient labor market and corporate earnings reports. From July 31 to August 16, the S&P 500® Index climbed 4.32% before declining 8.05% from August 16 through month-end. A recommitment by the Federal Reserve to do whatever it takes to conquer record inflation – for as long as it takes – soured investor optimism and accelerated the market pullback that began mid-month.
The U.S. labor market remained tight and macroeconomic data released in August reflected a resilient economic backdrop despite record inflation, tightening monetary policy and a broad economic contraction. The second estimate of Gross Domestic Product for the second quarter of 2022 showed that the U.S. contracted by an annualized rate of 0.6%, slightly better than the consensus expectation of a 0.9% contraction during the quarter. The July unemployment rate of 3.5% improved from the previous month and was slightly better than the consensus estimate, while the participation rate declined to 62.1%. The July Consumer Price Index, released August 10, remained near record highs with a year-over-year increase of 8.5%, which was slightly below the consensus expectation. Second quarter aggregate operating earnings were on track to decline 2.4% quarter-over-quarter while increasing nearly 17% year-over-year. With over 97% of companies reporting, nearly 80% met or exceeded analyst estimates.
Implied volatility, as measured by the Cboe® Volatility Index (the VIX®), averaged 22.17 in August. Consistent with its typical relationship, average implied volatility exceeded realized volatility, as measured by the standard deviation of daily returns for the S&P 500® Index, which was 19.36% for the month. The VIX® closed July at 21.33 and drifted to an intra-month low of 19.53 on August 12 before climbing to its intra-month high of 26.21 on August 29. The VIX® closed the month at 25.87.
The Bloomberg U.S. Aggregate Bond Index returned -2.83% in August, bringing its year-to-date return to -10.75%. The yield on the 10-year U.S. Treasury Note (the 10-year) ended July at 2.65%, touched its intra-month low of 2.57% on August 1, then climbed to close the month at its intra-month high of 3.19%. Throughout the entire month of August, the yield curve was inverted with the yield on the 2-year U.S. Treasury Note exceeding the yield on the 10-year.
1The BXMSM is a passive total return index designed to track the performance of a hypothetical buy-write strategy on the S&P 500® Index. The construction methodology of the index includes buying an equity portfolio replicating the holdings of the S&P 500® Index and selling a single one-month S&P 500® Index call option with a strike price approximately at-the-money each month on the Friday of the standard index-option expiration cycle and holding that position until the next expiration.
Sources: Morningstar DirectSM, Bloomberg, L.P. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
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