Volume 10, Issue 39
The major U.S. equity benchmarks lost significant ground last week as markets reacted to hawkish forecasts from the Federal Reserve’s latest meeting and rising U.S. Treasury yields. The S&P 500 recorded its largest one-day loss in six months on Thursday on its way to a third-straight losing week. Worries about the impact of the United Auto Workers’ strike and the potential for a U.S. government shutdown also weighed on sentiment. Small caps underperformed large caps, and the real estate sector was particularly hard hit.
As expected, the Fed left its short-term lending benchmark at a target range of 5.25 to 5.50 percent, the level set at the previous meeting in July, and its updated Summary of Economic Predictions continued to show one more rate hike in 2023. However, policymakers surprised markets with an outlook for rates in 2024 that was notably higher than expected, and their rate prediction for 2025 also increased. Moreover, the central bank raised its growth forecast, an acknowledgment that the economy has been more resilient than expected.
Apart from the Fed meeting, it was a relatively light week for economic news. Weekly initial jobless claims came in lower than predicted and fell to the lowest level since January, further reinforcing views that the labor market remains strong.
The prospect of the Fed keeping short-term rates higher for longer, along with healthy economic growth signals, helped send longer-term U.S. Treasury yields higher, with the benchmark 10-year U.S. Treasury yield reaching a 16-year high. Rates are wildly different than they had been during the pandemic (see below).
Pandemic rate lows: 1T 0.04%; 2T 0.09%; 5T 0.19%; 10T 0.52%; 30T 0.99%.
Current: 1T 5.46%; 2T 5.10%; 5T 4.57%; 10T 4.44%; 30T 4.53%.
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 FOMC unanimously decided to hold the benchmark federal funds rate at its current range of between 5.25 and 5.5 percent – the highest rate in 22 years – keeping with analysts’ expectations. Committee members summarized their thinking in a policy statement that read mostly like the statement from their July meeting when they raised rates by 25 basis points. “Recent indicators suggest that economic activity has been expanding at a solid pace,” the FOMC wrote. “Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.”
While inflation has been on a downward trajectory, Fed officials made clear they need to see more improvement before they would consider cutting rates. “What we decided to do is maintain the policy rate and await further data,” Powell said at a press conference Wednesday. “We want to see convincing evidence, really, that we have reached the appropriate level. We’ve seen progress, and we welcome that, but we need to see more progress.”
The Fed meeting managed to be even more hawkish than markets had anticipated. Yields across the curve busted out to fresh multiyear highs – including the two-year rate jumping to 5.2 percent for the first time since well before the 2008 financial crisis.
The Federal Reserve is hoping for something it has never managed before: not merely the softest of soft landings for the economy but the slowest rate-cutting cycle in its history.
Home sales declined again in August, falling to their slowest pace since January and intensifying the worst U.S. housing slump in more than a decade.
The labor market has cooled off, but employers are still holding on to workers. U.S. jobless claims, a proxy for layoffs, fell last week to 201,000, the Labor Department announced the lowest level since January.
While many companies have been cutting staff and freezing new hires this year, the government is laying out the welcome mat. Public-sector jobs at the federal, state, and local level have risen by 327,000 positions so far in 2023, according to the Bureau of Labor Statistics. That is approaching one-fifth of all new American jobs created in the first eight months of the year. In contrast, public-sector jobs accounted for 5 percent of employment growth during the equivalent period last year.
On the eve of recessions in 1990, 2001, and 2007, many Wall Street economists proclaimed the U.S. was on the cusp of achieving a soft landing, in which interest-rate increases would corral inflation without causing a recession. Similarly, this summer’s combination of easing inflation and a cooling labor market has fueled optimism among economists and Federal Reserve officials that this elusive goal might be in reach. But soft landings are rare for a reason: They are tricky to pull off.
Oil is close to $100 a barrel, posing a new challenge for central banks in their battle against inflation.
The U.S. national debt surpassed $33 trillion last week for the first-time in history, in part due to a 50 percent increase in federal spending between fiscal year 2019 and 2021, the Treasury Department announced.
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 advisors should know about a client’s wealth confidence (Leo Almazora)
- How Individual Retirement Accounts Changed the Stock Market Forever (Ben Carlson)
- SPIVA U.S. Mid-Year 2023 (S&P Global)
Last year, 650,000 Americans over 80 were still working, up 18 percent from the previous decade. At 76, 79, and 80, Ronnie Wood, Keith Richards, and Mick Jagger of the Rolling Stones are just one example of how the makeup of the workforce is grayer than you might think.
“It is easier, far easier, to obey another than to command oneself.”
~ Irvin D. Yalom
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 guarantee against loss in declining markets.