Stocks and bonds retreated in August as comments from Fed members suggested a bias toward another possible rate hike or at least keeping rates elevated longer. Return on longer dated Treasury bonds turned negative for the year.

Eyes on AI

There was significant fanfare around Nvidia’s earnings, as the company serves as a barometer of demand for equipment that powers AI. The leading developer of graphics processing units reported another blowout quarter, but the stock remained relatively flat, demonstrating that the company will have to exceed very high expectations to continue to drive its stock higher.

Small & large cap stocks

Small cap and value stocks rallied to start the third quarter, but lost momentum in August. A popular narrative around small cap underperformance this year is that bigger companies tend to have less debt and were also able to refinance at lower rates with longer maturities than smaller ones. There is truth to this, however our view is that corporate balance sheets in general are at healthy levels and the impact of rates on earnings may be being overstated. Meanwhile, the Russell 2000 Small Cap Index is now considerably cheaper than the S&P 500 on a Price to Book and Price to Sales basis, creating potential upside. 

Chinese stocks fell this month on reports of weakening macro-economic conditions and stress at mega property developer Country Garden. While it will be interesting to see how China’s overbuilt property market evolves, the Chinese stock market, like ours, is dominated by large cap technology companies. Unlike the U.S., the Chinese tech giants have generally lost value over the last couple of years and now trade at much lower valuations. We often say that stock markets are not a measure of a country. That remains true in China, but perhaps to a lesser degree because the authoritarian government has much greater influence on how companies operate.