Trust Investment Management
As summer drew to a close, investors had reason to celebrate alongside their families. All major asset classes posted positive returns for the month of August. While U.S. large caps, represented by the S&P 500, reached several new all-time highs, it was U.S. small caps that stole the show. Small caps surged 7.14%, outperforming other asset classes, as dovish Fed commentary fueled expectations of rate cuts beginning in September. Small caps tend to be more dependent on borrowing and can benefit from falling rates. Lower rates helped fixed income close out the month in the green, while global bonds also benefited from a weaker U.S. dollar.
The Bureau of Economic Analysis (BEA) released the latest inflation report toward the end of August. The core Personal Consumption Expenditures (PCE) price index increased 2.9% year-over-year. While the increase was in line with expectations, the uptick from the previous month—possibly driven by tariff-related pressures—kept inflation above the Fed’s 2% target.
The Fed has a dual mandate of price stability and maximum employment. In his Jackson Hole speech, Chair Jerome Powell acknowledged a “challenging situation,” with inflation risks tilted upward and employment risks downward. He noted that this shifting balance “may warrant adjusting our policy stance.” Following the speech, the probability of a 25-basis-point rate cut in September rose to 95.4%, according to the CME’s FedWatch tool.
The BEA revised second-quarter U.S. Gross Domestic Product (GDP) upward to 3.3%, from an initial estimate of 3.0%. The report also showed that consumer spending rose 0.5% last month, in line with expectations. As the economy continues to show resilience, investors remain focused on inflation trends, labor market dynamics, and the Fed’s next moves.
