August was positive for stock investors, with the global market rising by 2.3%. Returns were largely uniform across major stock categories, with most clustering close to the global average. Breaking away from the pack, emerging markets delivered the best performance of August, rising by 3.85%. From the headlines, one would think the bond market had suffered, but it also rose slightly by 0.12%, as coupon payments delivered a positive result and interest rates stayed level.
Corporations continued along their positive path, buoyed by solid second-quarter corporate profits. According to FactSet, nearly every large public U.S. corporation has now reported their second quarter earnings, and the collective year-over-year profit growth has been an astounding 52%. In what was probably the most anticipated filing, Nvidia released its results in the final few trading days of August, and the results were impressive. Not only did its revenue more than double over the past 12 months, but it is also expecting revenue to increase by another 70% in 2027. While the scale and sustainability of AI capital expenditures have been a source of recent market anxiety, robust demand for Nvidia’s chips should help ease some of those concerns.
Economic data were more mixed. The full CPI rose by 3.4% over the last 12 months, still showing the effects of the war on Iran. While higher than it should be, it’s still not egregious. The unemployment rate fell slightly to 4.1%, but new hiring remains low. Ordinarily, low job growth and moderate inflation discourage the Federal Reserve from raising rates. However, consumer prices have been above the Fed’s target of 2% since early 2021, and there is growing realization that more likely needs to be done to dampen inflation’s recent acceleration. While the Fed left rates alone after its late July meeting, a handful of dissenters wanted to raise rates, and Chairman Warsh recently said the Fed may not be done fighting inflation. Investors are assigning 60% odds of a rate hike at the conclusion of the next FOMC meeting on September 16th.
Despite these remarks, yields didn’t move much higher. Similar statements from other Fed officials over the past 2 months have already prepared markets for a more hawkish Fed. It is worth remembering that even if yields move somewhat higher from here, today’s starting yields offer a much better cushion than investors had during the low-rate years, along with a competitive source of return relative to more modest long-term expectations for stocks. Just as importantly, high-quality bonds still play a critical role as portfolio ballast: if enthusiasm around AI and other growth themes cooled, bonds could help offset stock market volatility and provide liquidity when it is most valuable. In that sense, bonds remain a crucial part of a balanced portfolio, offering both meaningful income and useful protection.