Stocks: The S&P 500 gained 2.1% in August, bringing year-to-date growth to 10.7%. Large Cap Value led at +3.2%, while Growth advanced 1.2%.
Sector Spotlight: Health Care was the top-performing sector. Utilities and Technology both slipped, though AI-related companies remain a market driver.
International Stocks: A weaker U.S. dollar supported overseas markets. Developed Markets rose 4.5% and Emerging Markets gained 2.7%.
Bonds: Treasury yields fell, pushing the U.S. Bond Aggregate up 1.2%. Investment-grade corporates gained 1.0% and high-yield advanced 1.1%.
Fed’s Tone Shifts as Labor Market Softens
After holding rates steady most of the year, the Federal Reserve signaled in August that a policy pivot may be near. The July jobs report showed fewer payroll gains and an unemployment uptick to 4.2%, highlighting the drag of high borrowing costs. At the Fed’s annual Jackson Hole meeting, Powell suggested risks are now balanced, opening the door to a cut at the September 17 meeting.
Markets quickly priced in this shift. Equities rallied, bond yields dropped, and the dollar weakened. In our view, the Fed’s path forward remains tied to jobs and inflation data, but the narrative has clearly shifted toward growth support. Investors should recognize that a rate cut may provide short-term relief, yet does not eliminate risks tied to tariffs and stubborn price pressures.
Small Caps Shine, Tech Still in the Spotlight
The Russell 2000 posted its best month this year, rising more than 7% and outpacing the S&P 500 by over 5%. Small caps tend to benefit more when rates fall, and with valuations at two-decade discounts to large caps, investors took notice. Whether this rotation lasts will depend on upcoming inflation and labor reports.
Meanwhile, growth sectors staged a rebound after Powell’s remarks. Technology and communication services led the charge, though concerns about frothy AI valuations resurfaced. One widely followed AI stock fell into correction territory after a short-seller report, reminding investors that discipline still matters. With multiples elevated, future returns will rely more on earnings delivery than multiple expansion.
Income Opportunities, but Risks Persist
Fixed income rallied broadly in August. Treasuries, corporates, munis, and securitized products all gained as yields declined. MBS, CMBS, and preferreds outperformed similar-duration Treasuries, while strong muni issuance was met with steady inflows. For long-term investors, this environment has created attractive entry points for income strategies.
At Defiant Capital Group, we remain cautious. A dovish Fed may help stabilize markets, but tariff-related risks, inflation uncertainty, and geopolitical tensions cannot be ignored. In our view, this is not the time to chase headlines. It is the time to position portfolios for resilience, balancing opportunity with discipline.
