August 13, 2023
Volume 10, Issue 33
The major domestic equity benchmarks ended mixed last week, as traders weighed inflation data against worries over the recent rise in long-term interest rates. Value stocks handily outperformed growth stocks, and the narrowly focused Dow Jones Industrial Average managed a modest gain. Volumes were generally light, reflecting both the summer vacation season and a seeming lull as the quarterly earnings reporting season wound down.
Health care shares got a boost at midweek from further evidence of the efficacy of diabetes drugs in treating obesity and related ailments, while information technology stocks underperformed on worries that rising rates would reduce the value of future profits. Industrials stocks were also weak on growing fears over a strike by the United Auto Workers union.
Financials stocks sold off briefly on Tuesday morning after Moody’s lowered its credit ratings for 10 small- and mid-cap banks and placed six other entities on downgrade watch. Moody’s cited funding costs as well as the banks’ exposure to the troubled commercial real estate sector. Shares in the sector recovered to some degree as the week progressed.
The week’s economic calendar was relatively light overall but included some closely watched inflation data. On Thursday, stocks jumped at the start of trading on news that the Labor Department’s consumer price index rose 0.2 percent in July, bringing its year-over-year increase to 3.2 percent, a tick below expectations. A sharp drop in airline fares helped compensate for continuing pressure from shelter costs.
Enthusiasm over the CPI data appeared to wane as the day wore on, however, and stocks were mixed on Friday, following news that producer prices rose 0.3 percent in the month, a tick above expectations. On a year-over-year basis, producer prices rose 0.8 percent, well below the Federal Reserve’s overall consumer inflation target of 2 percent. July marked the first annual increase in the rate of producer price inflation in over a year.
The week also brought a somewhat mixed inflation outlook from Federal Reserve officials. Over the previous weekend, Fed Governor Michelle Bowman warned that further hikes might be needed, while New York Fed President John Williams suggested that rate hikes were nearing their end and that rate cuts might be coming as soon as 2024. On Tuesday, Philadelphia Fed President Patrick Harker stated that he was comfortable keeping rates steady for now, while Richmond Fed President Thomas Barkin suggested he was also in favor of a pause in the hiking cycle.
The producer price report pushed the yield on the benchmark 10-year U.S. Treasury note higher to end the week after a week of rates creeping higher, especially in the intermediate part of the curve.
A full listing of market performance data is available here.
DQYDJ.com (“Don’t Quit Your Day Job”) offers helpful investment calculators here, including one that shows total returns for individual stocks.
Koyfin.com provides reams of data on individual stocks, including the ability to track total return — and just about anything else — over time.
In the News
The Consumer Price Index rose 0.2 percent month-over-month and 3.2 percent annually in July, the Bureau of Labor Statistics reported Thursday, compared to 0.2 percent and 3 percent in June. The increase was lower than expected and the annualized uptick is largely due to “base effects” — inflation was unusually low month-over-month last July because June 2022 marked a 40-year high of 9.1 percent, skewing the base of a 12-month comparison. The Fed will get one more CPI report before its September 19 meeting where most analysts expect the central bank to pause its rate-hiking campaign.
U.S. producer prices increased slightly more than expected in July as the cost of services rebounded at the fastest pace in nearly a year, but the trend remained consistent with a moderation in inflationary pressures. The report from the Labor Department on Friday also showed goods prices outside food and energy were unchanged last month, indicating that the recent goods disinflation was becoming entrenched. Underlying producer prices also rose moderately.
Booming oil prices last year powered U.S. inflation to 40-year highs. That trend was reversing in 2023 — until now. Benchmark crude prices are up 21 percent over the past six weeks, driving up the cost of American workers’ commutes, freight haulers’ trips to and from warehouses and the production of everything from plastics and fertilizers to clothing.
Consumer sentiment slightly soured in the dog days of summer, even as inflation expectations decreased slightly. The University of Michigan’s consumer sentiment index dropped to a reading of 71.2 in the first two weeks of August from 71.6 in July, according to preliminary data. Economists had predicted it would come in at 71.3. July’s sentiment reading was the highest level in nearly two years, boosted by cooling inflation.
With employers fighting for a limited pool of office workers, those offering remote-friendly jobs appear to have the upper hand.
Moody’s Investors Service downgraded 10 regional banks, sending financial shares lower and renewing concerns about the sector’s health.
Social Security recipients are on track to pocket a significantly smaller raise in 2024 because of a slowdown in inflation.
Morningstar publishes its “Mind The Gap” analysis each year (the most recent one is here), analyzing why investors’ performance lags the performance of the underlying investments. In every category, the investment/asset class outperformed the actual investor owning that investment/asset class.
Charts of the Week
I found the following articles to be of note. Some may be of interest only to advisors while others are aimed more broadly. You may hit paywalls below; most can be overcome here.
What Makes a Great Investor? (Charlie Bilello)
American stocks are at their most expensive in decades (The Economist)
Americans are tapping into their 401(k) accounts in order to make ends meet in troubling new data from Bank of America. The number of people who made a hardship withdrawal surged by 36 percent in Q2 of 2023 vs Q2 of 2022.
“There is considerable overlap between the intelligence of the smartest bears and the dumbest tourists.”
~ Yosemite National Park Ranger
Securities and advisory services are offered through Madison Avenue Securities, LLC, a member of FINRA and SIPC, a registered investment advisor.
This report provides general information only and is based upon current public information we consider reliable. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment or any options, futures, or derivatives related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment, or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Diversification does not guaranty against loss in declining markets.