Samantha Pnazek, Author at Raffa Investment Advisers

August Market Commentary

August 2023 Market Commentary & Outlook

August kicked off to a disappointing start with Fitch Ratings downgrading the US Government’s credit rating from AAA to AA+, citing rising debt and repeated debt-limit political standoffs as part of their reasoning. Fed Chair Jerome Powell did not rule out further rate hikes to cool inflation in his speech at the Fed-Sponsored Jackson Hole Symposium, and the 10-year treasury yield reached its highest level since November 2007 before easing to end the month. Despite this, the broad bond market was flat for the month.

US Stocks declined in August, with the Russell 3000 index posting its first negative month since February. Corporate earnings of S&P 500 firms beat expectations but declined for a third consecutive quarter. However, core CPI rose at its slowest rate since October 2021. Weak economic data to end the month fueled optimism that the Fed may be done raising its benchmark interest rate, leading US stocks to finish the month strong, but not strong enough to get out of the red.

International equities were down as well amid worrying economic news from China. Concerns of China’s weakening economic outlook seeping into other areas of the global economy, eurozone inflation remaining persistently high, as well as more turmoil in Russia contributed to the pullback. Despite a lackluster August, both domestic and international equities have performed strongly over the year to date and trailing year.

Index Performance	August	Year to Date	Trailing 12 Months
US Stocks (Russell 3000)	-1.93%	18.01%	14.76%
Foreign Stocks (FTSE AW ex US)	-4.29%	9.14%	12.39%
US Bond Mkt. (BBgBarc Int. Gov/Cred)	-0.01%	1.75%	0.55%
Cash (ICE BofA ML 3-Mo T-Bill)	0.45%	3.13%	4.25%

Financial News and Portfolio Management Discussion Through August 12th

Positive inflation data failed to lift stocks from their August doldrums last week as economic data and a ratings downgrade soured investor sentiment. The Dow Jones Industrial Average added 0.62%, while the Standard & Poor’s 500 slipped 0.31%. The Nasdaq Composite index fell 1.90% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, rose 0.50%.^1,2,3

Stocks struggled last week, beginning on a strong note ahead of key inflation data and selling off mid-week in response to a downgrade of the banking sector by credit rating agency Moody’s and news of a steep drop in China’s exports. Emblematic of the week, stocks jumped to big gains following Thursday’s better-than-expected inflation report, only to evaporate as bond yields rose amid an auction of 30-year Treasury bonds. Stocks have had difficulty sustaining traction with the loss of the technology’s leadership, which has propelled gains this year. The combination of higher yields and earnings that failed to validate tech’s elevated valuations has dragged the sector and the larger market.

July’s inflation data reflected only moderate price pressures. Consumer prices increased by a modest 0.2%, which aligned with market expectations. In comparison, the annual inflation rate came in at 3.2%, slightly below consensus estimates–though higher than June’s annual increase of 3.0%. Core CPI (excludes food and energy) was particularly encouraging, rising at the slowest rate since October 2021.⁴ Producer prices painted a more mixed picture, coming in a bit higher than expected, rising 0.3% versus the expected 0.2% increase, though the year-over-year increase was just 0.8%. Core producer prices’ 12-month increase of 2.4% tied for the lowest since January 2021.⁵

_{1. The Wall Street Journal, August 11, 2023, 2. The Wall Street Journal, August 11, 2023, 3. The Wall Street Journal, August 11, 2023, 4. CNBC, August 10, 2023, 5. CNBC, August 11, 2023}

Financial News and Portfolio Management Discussion through August 4th

Stocks retreated last week as bond yields increased following the Treasury’s announcement indicating “a larger-than-expected funding need” and a downgrade in the federal government’s debt rating. The Dow Jones Industrial Average dropped 1.11%, while the Standard & Poor’s 500 shed 2.27%. The Nasdaq Composite index lost 2.85% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, tumbled 3.27%.^1,2,3

Stocks struggled as investor sentiment turned cautious amid rising bond yields. Markets were rattled initially by news that the Treasury raised its borrowing requirement for the third quarter by more than a quarter of a trillion dollars and on news that the Bank of Japan announced it would allow bond yields to rise after years of capping them. Rising yields continued to pressure stocks in the wake of a surprise rating downgrade of U.S. government debt by a major credit rating agency due to its belief in expected fiscal deterioration over the next three years.

Stocks rebounded Friday morning, rising on modest employment data only to reverse and add to the week’s losses. Fresh employment data last week gave some conflicting signals about the labor market. A new JOLTS (Job Openings and Turnover Survey) report showed a small decline in job openings and layoffs in June, leaving 1.6 job openings for each available worker.⁴ Automated Data Processing’s (ADP) employment report reflected strong private sector hiring with a 324,000 increase in jobs, exceeding the consensus forecast of a 175,000 gain.⁵ The government’s monthly employment report saw a cooling in hiring as employers added 187,000 jobs in July. This was slower than seen in the first six months but enough to shave the unemployment rate from 3.6% to 3.5%.⁶

^{1. The Wall Street Journal, August 4, 2023}^{2. The Wall Street Journal, August 4, 2023}^{3. The Wall Street Journal, August 4, 2023}^{4. CNBC, August 1, 2023}^{5. CNBC, August 2, 2023}^{6. The Wall Street Journal, August 4, 2023}

July Market Commentary

Market Commentary

US stocks posted another strong month in July driven by mostly positive economic news. With about half of S&P 500 companies reporting second quarter earnings, 80% have reported positive earnings surprises. Although, many issued negative earnings guidance for the third quarter, signaling a slow down may be ahead. U.S. employers added 209,000 jobs in June, below the estimate for 240,000. Hourly wages grew by 4.4% from a year ago, slightly higher than expectations. The unemployment rate fell to 3.6% in June from 3.7% the prior month. Second quarter GDP rose at a 2.4% annualized pace, topping the 2% estimate. The strong quarter helped reduce investor recession fears. CPI rose 3% from a year ago in June, down from 4% in May, the lowest level since March 2021. Core CPI, which excludes food and energy prices, increased 0.2% for the month and 4.8% over the past year. Producer prices increased 0.1% over the past year, the smallest increase since September 2020. Core personal consumption expenditures index, the inflation gauge the Fed prefers, was up 4.1% annually in June, the lowest annual increase since September 2021. US retail sales surprised economists again in June increasing by 0.6% versus estimates of a 0.4% decline. Demand for goods remained strong helping accelerate growth over the second quarter. Existing home sales dropped 3.3% in June and 18.9% compared with last year, the slowest pace for June since 2009.

Foreign stocks increased in July outpacing US stocks for the month as some foreign central banks expect to pause their rate increases soon. The European Central Bank raised its benchmark rate a quarter percent in July to 3.75%, but signaled it might soon pause its rate increases. In a surprise move, the Bank of Japan made changes to its monetary policy, signaling it would tolerate higher yields on longer-term Japanese government bonds. The BOJ has been an outlier among the world’s major central banks in not having to fight high inflation. Inflation in the UK increased by 7.9% annually in June down from 8.7% in May. While the rest of the world is fighting inflation, signs of deflation are becoming more prevalent across China. Prices charged by Chinese factories have been falling for months and prices for certain goods—including sugar, eggs, clothes and household appliances have been falling on a month-over-month basis amid weak demand. Oil prices jumped approx. 15% in July, ending the month at $81.80 a barrel versus $70.64 the month prior. Emerging markets outpaced developed markets in July, while developed markets have outpaced for the year to date.

Interest rates were relatively flat in July as investors focused on the improving inflation picture. Through out the month, Fed officials said they expected they would need to lift interest rates further this year after pausing increases in June. The Fed resumed lifting rates at their July meeting with a quarter-point increase that will bring it in a range between 5.25% to 5.50%, a 22-year high. Chairman Powell said it was too soon to tell whether the hike would conclude the increases aimed at cooling the economy and bringing down inflation. The yield on the 10-year Treasury increased in July rising to 3.96% from 3.81% in June. Muni bonds performed best in July, while corporate bonds outpaced over the year to date. Shorter-term bonds performed better than longer-term bonds in July and over the year to date.

Index Performance	July	Year to Date	Trailing 12 Months
US Stocks (Russell 3000)	3.58%	20.33%	12.65%
Foreign Stocks (FTSE AW ex US)	4.14%	14.03%	13.89%
US Bond Mkt. (BBgBarc Int. Gov/Cred)	0.26%	1.77%	-1.44%
Municipal Bonds (BBgBarc 1-10 Yr Muni)	0.32%	1.61%	0.42%
Cash (ICE BofA ML 3-Mo T-Bill)	0.40%	2.66%	3.95%

Financial News and Portfolio Management Discussion through July 29th

A Friday surge pushed stocks solidly into positive territory last week, ignited by cooling in an inflation gauge closely tracked by the Federal Reserve. The Dow Jones Industrial Average advanced 0.66%, while the Standard & Poor’s 500 climbed 1.01%. The Nasdaq Composite index rose 2.02% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 0.74%.^1,2,3

Stocks were flat for much of last week amid a batch of new earnings, a 0.25% interest rate hike, and strong economic data. After beginning with gains, stocks lost momentum following the Fed’s expected rate-hike announcement on Wednesday. A bounce on Thursday sparked by a positive mega-cap tech company earnings reversed after bond yields increased. Stocks recovered strongly Friday on the release of the personal consumption expenditures price index, which fell to its lowest level in two years.⁴ Much of the market action was related to earnings results. With 44% of S&P 500 companies reporting, 78% have exceeded Wall Street forecasts.⁵

Expectations of a recession were high coming into 2023. Last week may have erased this recession narrative overhang. Second-quarter gross domestic product (GDP) data released last week was one big reason why. Economic activity expanded by 2.4%, which was above the forecast of two percent and represented an acceleration from its first quarter GDP of 2.0%. Consumer spending was a major driver of that expansion, rising 1.6%.6 Joining the recession-deferred camp this week was Fed Chair Powell, who stated that the Fed was no longer forecasting a recession.

_{1. The Wall Street Journal, July 28, 2023, 2. The Wall Street Journal, July 28, 2023, 3. The Wall Street Journal, July 28, 2023, 4. CNBC, July 28, 2023, 5. CNBC, July 27, 2023, 6. CNBC, July 27, 2023.}