Weekly Market Update – August 04, 2023

Quick Takes

• Stocks and bonds took a breather in the first week of August after a strong July. Most major indices were down for the week, with the U.S. stocks and bonds outperforming their non-U.S. counterparts.
• The S&P 500 Index fell -2.3% while the MSCI EAFE Index dropped -2.4%. In the bond world, the Bloomberg U.S. Aggregate Bond Index fell -0.6%, while non-U.S. bonds slipped a bit more with the Bloomberg Global Aggregate ex U.S. Bond Index falling -1.0%.
• On Tuesday, rating agency Fitch unexpectedly downgraded the S. credit rating one notch to AA+ from the top level of AAA. Fitch cited expected fiscal deterioration over the next three years, a high and growing government debt, and an erosion of fiscal governance.

Markets take a breather in the first week of August

Stocks and bonds fell in the first week of August after a strong July. The big headline of the week came on Tuesday from rating agency Fitch, when it unexpectedly downgraded the U.S. government’s credit rating one notch to AA+ from the top level of AAA. Fitch cited expected fiscal deterioration over the next three years, a high and growing government debt burden, and an erosion of governance manifested in repeated debt limit standoffs and last-minute budget resolutions over the last two decades. The U.S. Treasury Department announced that it will borrow about $1.85 trillion in the second half of 2023, $1 trillion in the third quarter alone. That sent bonds on a wild ride, with the benchmark 10-year Treasury yield swinging nearly 10 basis points (bps) lower to end the week at 4.03% after briefly climbing to as high as 4.2%. The 2-year U.S. Treasury yield declined -11 bps to 4.76%, helping to further relieve some of the inversion in the yield curve. As a result, the Bloomberg U.S. Aggregate Bond Index fell -0.6%, while non-U.S. bonds slipped a bit more with the Bloomberg Global Aggregate ex U.S. Bond Index falling -1.0%.

For the week, the S&P 500 Index fell -2.3%, the small-cap Russell 2000 Index declined -1.2% and the tech-heavy Nasdaq Composite Index suffered the largest losses of the week with a -2.9% drop. It was an extremely busy week of earning releases, and results were mixed with big beats from the likes of Amazon and Meta, but underwhelming results from heavyweights like Apple. Only three of the eleven S&P 500 sectors were up for the week, led by Communication Services, which was up +4.7% after last week’s +6.8% surge. Overseas, investors had to contend with a rate hike from the Bank of England and a surprise policy tweak from the Bank of Japan that sent 10-year Japanese government bonds (JGBs) to nine-year highs. Developed market international stocks (as measured by the MSCI EAFE Index) and the MSCI Emerging Markets Index each sank -2.4% for the week.

Chart of the Week

The June Job Openings Labor Turnover Survey (JOLTS) report fell below the 10 million mark for the fourth time this year with a drop to 9.58 million, the lowest level since April 2021, just below expectations for 9.60 million as well as the prior month’s 9.62 million (revised down from 9.82 million). However, layoffs also declined to the lowest since the end of last year, suggesting employers are reticent to let go of staff. Job openings are an indication of the health of the labor market and the broader U.S. economy. Current levels are still historically high, but well off the peak of 12 million last year. Openings rose the most in health care and social assistance, as well as in state and local government positions. Job listings declined in transportation and warehousing. The number of job openings for each unemployed worker remained at 1.6 in June, remaining well above pre-pandemic levels of 1.2. The Fed is watching the ratio closely and wants to see it fall back to pre-pandemic norms. The Hiring Rate slipped to 3.8% from 4.0% the prior month and has been little changed in recent months. The Quits Rate decreased to 2.4% from 2.6% the prior month and is off from the peak of 3.0% in April 2022.

Jobs Market Still Tight but Shows Signs of Cooling

U.S. job openings vs. the number of unemployed

Note: Seasonally adjusted.
Source: Labor Department, The Wall Street Journal.

Economic Review

• The July Employment Situation showed slower hiring in the summer and the unemployment rate dipping near a half-century low. On Friday the Labor Department reported that U.S. employers added a seasonally adjusted 187,000 Non-Farm Payrolls (NFP) during the month, down from a negatively revised 185,000 in June (originally 209,000), and below Wall Street expectations for 200,000. That was the second straight month that payrolls failed to exceed expectations after a streak of fourteen consecutive months of payrolls beating Wall Street forecasts. It was the smallest increase in new jobs since December 2020. Payrolls have been revised downward from the initial release for six consecutive months now–the longest streak of negative revisions since the global financial crisis. 47% of July’s total jobs created were from medical providers and social programs. Hiring also rose slightly in leisure and hospitality, finance, wholesale, and government. The Unemployment Rate dipped to 3.5% from 3.6% where it was expected to remain. Average Hourly Earnings were up +0.4% in July, unchanged from June and just above expectations of +0.3%. Year-over-year, Average Hourly Earnings were up a solid +4.4%, also unchanged from June and just above expectations for +4.2%. In another sign of a softening labor market, the Average Weekly Hours people worked fell a tick to 34.3 and matched a post-pandemic low. Businesses tend to cut hours before resorting to layoffs when the economy slows. As expected, Labor-Force Participation was unchanged at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%, but at the highest level since the pandemic.
• The Institute for Supply Management’s (ISM) Manufacturing PMI improved a bit to 46.4% in July from 46.0% in June, which was the lowest since the pandemic in 2000. July’s result was below Wall Street expectations of 46.9% (levels below 50% signal economic contraction). Economic activity in the manufacturing sector has now contracted for nine consecutive months following a 28-month period of growth, which is the longest monthly losing streak since the 2007-2009 Great Recession. Like the overall index, New Orders have been stuck in contraction for eleven months now but did manage to climb to 47.3 from 45.6 in June. The Production index rose +1.6 points to 48.3. The Backlog of Orders index was the largest gainer for the month, rising +4.1 points to 42.8. The Employment Barometer declined again after falling into contraction in May, falling -3.7 points to 44.4, the biggest decline of the ten components, and the lowest level since July 2020. New Export Orders were the only other component that fell in July, slipping -1.1 points to 46.2. The Prices Paid index, a measure of inflation, rose +0.8 points to 42.6.
• The ISM Non-Manufacturing (Services) Index expanded for the seventh month in a row but did slow a bit to 52.7 in July from 53.9% in June, short of expectations for 53.1% (the line between expansion and contraction is 50%). New Orders slipped -0.5 points to 55.0%, the Production index dropped -2.1 points to 57.1, and the Employment index fell -2.4 points to 50.7. The Prices Paid index, a measure of inflation, rose +2.7 points to 56.8%. “Supplier costs (are) not coming down as much as expected,” a wholesale trade executive told ISM.
• The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index (PMI) remains in contraction territory but improved to 49.0 in July, the best level in three months reached just a month after June’s sharp fall to 46.3. Driving the downturn was a further fall in New Orders, but manufacturers also had to contend with rising Input Costs, although most prices were relatively stable. A challenging sales environment led firms to scale back their input buying, causing inventory holdings to be depleted strongly. Companies expanded Employment at a faster rate amid greater confidence in the outlook for output.
• The S&P Global US Services PMI fell in July for the second consecutive month but remains well in expansion territory at 52.3 versus 54.4 in June. The rate of growth was the softest since February and weaker than the long-run series average. The expansion was attributed to a sustained increase in New Orders and continued demand from existing customers. New Export Orders rose at a sharper pace, however, for the third successive month and at a solid pace amid reports of stronger demand from foreign customers. On the price front, Input Prices at service providers increased at a further marked pace during July. Similarly, Output Prices continued to rise at a pace faster than the series trend.
• June Factory Orders rose +2.3%, primarily from a big boost of contracts for Boeing planes and in line with expectations. That follows an upwardly revised +0.4% increase in May (originally from 0.3%). Ex-Transportation, orders were up just +0.2%, also in line with expectations and an improvement from May’s -0.4 (revised up from the initial -0.5). Durable Goods Orders rose +4.6%, just shy of the initial estimate of +4.7% (Durable Goods are released ahead of the full report). Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.1% in June, in line with expectations but down from +0.2% in May. Nondurable Goods Orders were up a smidge at +0.1%.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), improved to 42.8 from 41.5 the prior month, underperforming expectations of 43.5. The Prices Paid component rose at a faster pace—signaling expansion—but New Orders, Employment, Inventories, Supplier Deliveries, Production, and Order Backlogs all fell—signaling contraction. The index has remained below 50 (the break-even point distinguishing expanding versus contracting economic activity) for eleven consecutive months. The index peaked at 71.3 in May 2021.
• Texas factory activity hit its highest level in four months in July with a rise in the Texas Manufacturing Outlook Survey to -20.0, up from -23.2 in June, and beating expectations for -22.5. May was a three-year low at -29.1. The Production index, a key measure of state manufacturing conditions, slipped further to -4.8, and the New Orders index dipped to -18.1 from -16.6 and has been in negative territory for more than a year. The Six-Months Ahead outlook components of the survey turned positive for the first time since April 2022, rising to +4.6 from -4.5. Expectations for Capital Expenditures to rise jumped to the highest levels since the middle of last year. The Texas Service Sector Outlook Survey also improved in July, but it too remains in contraction territory at -4.2, up from -8.2 in June. Also like the manufacturing sector, the services sector’s Six-Months Ahead outlook turned positive, moving up to +4.4 from -1.6 in June.
• The Commerce Department reported Construction Spending rose +0.5% in June to a seasonally adjusted annual rate of $1.93 trillion, trailing expectations for a +0.6% rise and May’s upwardly revised +1.1%, up from the initial release of +0.9%. Year-over-year (YoY), June total construction spending was up +3.5%, compared to +2.4% for the year ended May. Total Private Construction was up +0.5% month-over-month while total Public Construction rose +0.3% month-over-month. Total Residential Spending increased+ 0.9% month-over-month while total Nonresidential Spending rose just +0.1% month-over-month. Single Family construction rose +2.1%. Overall, the report showed residential construction spending, particularly single-family construction, remains strong despite the jump in mortgage rates.
• The weekly MBA Mortgage Application Index fell -3.0% for the week ended July 28, following the prior week’s -1.8% drop. The Purchase Index fell -3.2% following a -2.5% dip the prior week and the Refinance Index dipped -2.5% following a -0.4% slide the prior week. The average 30-Year Mortgage Rate was flat for the week remaining at 6.93%, which is +1.50 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims rose +6,000 to 227,000 for the week ended July 29, above expectations for 225,000 and last week’s unrevised 221,000 reading. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +10,000 to 1,700,000 in the week ended July 22, below consensus for 1,705,000, and up from last week’s reading of 1,679,00 (revised down from 1,690,00).

The Week Ahead

The economic calendar is much lighter in the coming week, with consumer (CPI) and wholesale (PPI) inflation reports likely to garner the most attention. Small business optimism and consumer sentiment will also be watched closely. The bond market may also make some headlines with the 3- and 10-year U.S. Treasury notes and 30-year bond auctions coming at much higher amounts, and yields at loftier levels, than originally forecast. About 85% of S&P 500 companies have reported earnings for the second quarter so far, so the pace of earnings reports will also be lighter in the week ahead. Still, there are some big names left to report such as Alibaba, Disney, Lilly, Sony, and United Parcel Service. So far, according to Bloomberg data, about 80% of S&P 500 firms have beaten Q2 consensus EPS estimates, and EPS growth is running at about -7.8%. However, the top line is not as robust, with only about 58.7% of companies beating sales estimates, which would be the lowest percentage of revenue beats in three years.

Did You Know?

MALLS STALL – Some older, low-end U.S. malls are worth 70% less compared with peak valuations in late 2016, according to real-estate research firm Green Street. Department-store closures, competition from other retailers, and the rise of online shopping have contributed to local malls’ deterioration. As loans backed by the properties come due, struggling shopping meccas are defaulting on their debt (Source: Green Street, The Wall Street Journal).

‘OVERBOUGHT’ – On July 27, the S&P 500 closed at short-term overbought levels (more than one standard deviation above the 50-day moving average) for the 42nd straight day, a streak that started the Friday before Memorial Day. The current streak is the longest since September 2020 (45 days) and the 24th streak of 40 or more trading days in the last 70 years (Source: Bespoke Investment Group).

TRANS-ATLANTIC FLIGHTS – The number of U.S. passengers on trans-Atlantic flights in July has increased by +14% from the same month in 2019. During the same period, the number of domestic travelers slid -2%, according to the trade group Airlines for America. U.S. travelers’ love for Europe is cutting into revenues of some U.S.-focused airlines (Source: Airlines for America, The Wall Street Journal).

This Week in History

PERSIAN GULF WAR – On August 2, 1990, Saddam Hussein commanded Iraqi forces to invade Kuwait. Over the next two and a half months, the U.S. stock market lost -19% and many experts began to forecast a protracted bear market. Yet, just one year later, stocks were up nearly +27% (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.