PNC Capital Directions Portfolio and Performance Review

• Markets Start the Month on a Roller Coaster Ride: On August 5th, volatility spiked to highs not seen since the COVID-19 lockdowns began in 2020. Equity markets sold off considerably, which exacerbated a slump that began in mid-July. Among the factors contributing to the downturn were softening labor conditions and slowing growth across many developed countries. Divergent interest rate policies for two of the world’s largest economies – the U.S. and Japan – also had a hand in the sharp movements, following the Bank of Japan’s rate hike. Still, markets quickly rebounded, and most major indices recovered their losses by the end of the month.
• Rate Cuts Seem Almost Certain: Following the Federal Reserve’s Jackson Hole Economic Symposium, Fed Chair Jerome Powell indicated that “The time has come for policy to adjust... [and]… The upside risks to inflation have diminished.” The statement seemed to support what investors had already priced into the fed funds futures market: the Fed will likely cut its benchmark rate at its September 18th meeting. Still, uncertainty remains as to how much the Fed will cut its policy rate at this, and subsequent meetings.
• Inflation Continues to Cool: In the Commerce Department’s most recent Personal Consumption Expenditure (PCE) report, the headline PCE index rose 0.2% in July (on a month-over-month basis), and it was up 2.5% from the same period a year ago, which was in line with consensus estimates from Dow Jones. The Core PCE index, which strips out more volatile components of the index like food and energy, also increased 0.2% for the month, but was up 2.6% from a year ago, which was slightly softer than consensus estimates of 2.7%, further indicating that inflation continues to moderate.
• Consumer Confidence Continues Rising: Consumer sentiment often provides valuable insights as to the current and future state of the economy, given that consumer spending accounts for over two-thirds of GDP. The Conference Board’s reading on its Consumer Confidence Index for August was relatively benign in that regard, increasing to 103.3 from 101.9 in July. While the survey indicated consumers still feel relatively upbeat about their current situation, sentiment about the future remained subdued, with modestly higher concerns about the job market and income prospects. 

• U.S. Low Volatility Equities, a segment of U.S. stocks which we currently prefer for its typically defensive characteristics, had a strong month, as the MSCI USA Minimum Volatility index returned 4.89% 
• Quality International Developed Equities, a subset of non-U.S. stocks we also favor, performed well, too, as the MSCI World ex US Sector Neutral Quality index generated 4.29% in August
• International developed Equities, the broader set of large- and mid-cap stocks within developed economies outside the U.S., deserve a note as well, returning 3.34% (MSCI World index)

• U.S. Small Cap Value moved from being a top contributor to a detractor with the Russell 2000 Value index falling 1.88%
• U.S. Small Cap Growth, as another detractor, showed the weakness in U.S. Small Cap was broad-based last month with the Russell 2000 Growth Index declining 1.11% 
• U.S. Mid Cap Growth was a detractor with the S&P MidCap 400 Growth index shedding 0.74% for the month

During the month of August, there were no asset allocation changes for the program.

Within stocks, we continue to prefer a tactical overweight to U.S. markets versus non-U.S. developed markets for most portfolios, based on what we believe to be the relatively stronger position of the U.S. economy. As part of U.S. allocations, we still favor a tilt to higher-quality, dividend-paying growth stocks as well as lower volatility stocks, for their potential to mitigate some downside.

In fixed income, we continue to prefer an intermediate duration (i.e., interest rate sensitivity) allocated to mostly higher quality, investment-grade bonds, as we expect slower economic growth over the near term. While some portfolios have positions in below-investment grade bonds, we have tactically underweighted this area (excluding some income-oriented portfolios).

We continue to diligently monitor the markets and your account, and we will keep you abreast of any changes to your portfolio allocation and investment selection that we deem appropriate so that you’re well positioned for what’s ahead.