Market Update: August 22, 2023
Economic releases for the week included the index of leading economic indicators continuing its long-running decline. However, retail sales and industrial production surpassed expectations on the upside. Housing data was mixed, as were several regional manufacturing surveys.
Stocks saw negative returns globally, with interest rates rising and concerns over the Chinese economy dominating sentiment. Bonds declined due to the direct impact of those rising yields. Commodities fell due to currency effects and demand concerns in oil and metals.
U.S. stocks fell back for the third straight week. Domestic economic data continued at a mixed to decent growth rate; however, the FOMC minutes soured the mood with some officials hinting at further rate hikes potentially being necessary, and negative economic news from China also eroded sentiment.
Every domestic sector lost ground, led by consumer discretionary down over -4% (with several members down, but mostly Tesla), followed by a decline in communications; on the other hand, energy, technology, and typically defensive health care and utilities suffered the fewest losses. Real estate also declined over -3% along with higher interest rates across the board.
Foreign stocks fell slightly more than domestic equities on the week, with currency explaining a bit of the difference. Wage growth in the U.K. and concerns over China affected Europe, due to closer trade relationships. Emerging markets were mixed, with Chinese stocks being the standout to the negative, down upwards of -5% on the week. In addition to slower-than-expected industrial production and retail sales numbers, Chinese policymakers lowered their 1-year interest rate on loans by -0.15% to 2.5%, which concerned global markets, as it has been coupled with weaker industrial and consumer growth, along with higher unemployment in that key market. This is the second straight cut, and the largest since the early pandemic. Officials have also decided to pause the publication of youth unemployment numbers with a rationale of hoping to improve data collection (as the current youth unemployment rate is over 21%, a troublesome level, this has raised some questions from observers). Questions also surround potentially more support for the property sector, where at least several firms are experiencing a debt crisis. The broader global effect remains a question mark, with the largest negative impacts thus far appearing to be on exporters of energy and minerals, which are largely focused in the emerging markets. There are several considerations that have kept Chinese assets under scrutiny this year, including a high general debt load/leverage, slowing demographics via an aging population and low replacement rate, uncertainty in the property market (which represents about a fifth of the overall economy), and ongoing back-and-forth with the U.S. regarding availability of more advanced technology and general geopolitical disagreement. Several or all of these factors could serve to depress economic growth, but current valuations do appear to reflect that poor sentiment.
Bonds were negatively impacted by hawkish Federal Reserve language, alluding to further future rate hikes. Aside from the minimal change in floating rate bank loans, which outperformed all other segments, credit underperformed government debt. Foreign bonds fell in keeping with a stronger U.S. dollar for the week.
The 10-year treasury note yield has continued to climb higher, subtlety reaching over 4.25%, the highest level in nearly a year, as the July FOMC minutes alluded to sentiment supporting further hikes. While the yield curve remains inverted, which usually indicates that short-term rates are assumed to come down (historically in response to recession), the long end of the curve can move a bit as well—in this case, anchored somewhat to an assumed higher terminal Fed funds rate. The 10-year yield is one of the world’s most important interest rates, and contains a good deal of information and assumptions all embedded into a single input. Out of the 10-year come a base level for credit spreads, commercial lending and residential mortgage rates, not to mention discount rates used to value stocks in cash flow models. Has the Fitch downgrade contributed to this? Perhaps on some level, but U.S. debt remains the world’s ‘risk-free rate,’ with no other competitor in a close second at this point. In theory, higher indebtedness and less certainty over fiscal discipline should result in a higher interest rate, although a variety of nations are in the same boat, and consistent demand for high-quality debt has kept rates contained. Somewhat ironically, following such a long period of low risk-free rates, as treasury rates have moved higher (especially due to an improved ‘real’ rate), so has investor interest.
Commodities were largely down on the week, led by energy and metals, along with a stronger dollar. Crude oil prices fell over -2% last week to $81/barrel, along with eroding confidence in a Chinese economic recovery. Natural gas corrected nearly -7%, with a larger stockpile and cooling of hot weather nationally as we reach the end of summer.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.