Monthly Market Insights | August 2023

U.S. Markets

Stocks added to their strong year-to-date gains in July as investors cheered decelerating inflation, better-than-expected corporate earnings, and healthy economic data.

The Dow Jones Industrial Average gained 3.35 percent, while the Standard & Poor’s 500 Index rose 3.11 percent. The Nasdaq Composite, which has led all year, advanced 4.05 percent.1

Yesterday, I was clever, so I wanted to change the world. Today, I’m wise, so I’m changing myself. Rumi, 13th-century Persian poet

Positive Inflation Reports

After a faltering start to the month, stocks rallied on favorable June inflation data. Consumer prices increased at the slowest rate in over two years, rising just 3 percent year-over-year. This encouraging report was followed by a smaller-than-forecast 0.1 percent rise in June producer prices (an indicator of future consumer prices).

The deflationary trend was further evidenced when the personal consumption expenditures price index, a key inflation measure watched by the Federal Reserve (Fed), rose 0.1 percent month-over-month and 4.1 percent from 12 months ago—the lowest annual increase since September 2021.2,3

Support from Earnings

Second-quarter earnings also boosted investor optimism last month. With 51 percent of S&P 500 companies reporting, 80 percent have reported earnings above Wall Street estimates, which is above the 5- and 10-year averages. The earnings beat in the second quarter was less impressive, however, averaging 5.9 percent, which is below the 5- and 10-year averages.4

Investors greeted the results with relief since the second quarter is traditionally a low point for corporate results. A number of industry sectors showed solid earnings growth, and some investors saw this as evidence of a healthy consumer and a potential sign of improving earnings in the second half of the year.4

Recession Fades

Finally, the overhang of a possible recession this year faded over the course of the month. Even Fed Chair Jerome Powell, following the Fed’s July meeting, remarked that the Fed no longer expected a recession this year.5

One of the most remarkable aspects about the market was that the Fed, as expected, raised interest rates 0.25 percent at its July meeting—and indicated that a future rate hike was not off the table—and the markets appeared to barely notice.

Sector Scorecard

All industry sectors ended in the green last month, with gains in Communications Services (+5.70 percent), Consumer Discretionary (+2.31 percent), Consumer Staples (+2.13 percent), Energy (+7.77 percent), Financials (+4.81 percent), Health Care (+1.07 percent), Industrials (+2.89 percent), Materials (+3.44 percent), Real Estate (+1.33 percent), Technology (+2.58 percent), and Utilities (+2.49 percent).6

What Investors May Be Talking About in August

Global central bank governors will be gathering at the Federal Reserve Bank of Kansas City’s annual Economic Policy Symposium in Jackson Hole on August 24-26.

At its May 2023 meeting, the FOMC announced a 25 basis point hike, adding that Committee members may decide to pause on future rate hikes, depending on fresh economic data and prevailing financial conditions.

This year’s discussion will center on structural shifts in the global economy. But investors will be focused on Fed Chair Powell’s comments on his monetary policy outlook for the coming months.6

Markets Prepare for Powell

At last year’s meeting, Powell’s speech was viewed by the financial markets as especially hawkish, triggering a sell-off with S&P 500 falling 3.37 percent.7

As August progresses, investors will be keenly watching the labor market and inflation since both may be key data points guiding Powell’s remarks in Jackson Hole. Any indications by Powell that the Fed may pause or stay the course may unsettle the markets.

World Markets

The MSCI EAFE Index gained 3.17 percent in July, aided by slowing inflation in Europe and China’s announcement of support for its troubled property market.8

European markets were higher, with gains in France (+1.32 percent), Germany (+1.85 percent), Italy (+5.01 percent), Spain (+0.51 percent), and the United Kingdom (+2.23 percent).9

Pacific Rim markets were mixed. China’s Hang Seng Index picked up 6.15 percent, and Australia’s ASX 200 added 2.88 percent. However, Japan was flat (-0.05 percent).10

Indicators

Gross Domestic Product (GDP)

The U.S. economy expanded by a 2.4 percent annualized rate in the second quarter. This was higher than the first quarter’s GDP growth rate of 2.0% and well above the consensus forecast.11

Employment

Employers added 209,000 new jobs in June, a sharp decelaration from May’s revised 306,000 new hires. The unemployment rate fell to 3.6 percent, while average hourly wages grew 4.4 percent from a year ago.12

Retail Sales

Retail sales rose 0.2 percent, falling short of economists’ consensus forecast of a 0.5 percent increase.13

Industrial Production

Industrial production fell 0.5 percent in June. Despite falling for the second consecutive month, industrial production increased at an annualized rate of 0.7 percent in the second quarter.14

Housing

Housing starts tumbled 8.0 percent in June and were 8.1 percent lower than a year ago. Permits to build, an indicator of future new housing starts, also declined, slipping 3.7 percent from May.15

Sales of existing homes fell by 3.3 percent in June, owing to the continued tight inventory of homes on the market.16

New home sales contracted by 2.5 percent month-over-month, while increasing 23.8 percent from last June.17

Consumer Price Index (CPI)

The rise in consumer prices continued their cooling trend, falling to their lowest level in over two years. The CPI rose a modest 0.2 percent in June and 3.0 percent from a year ago. Both came in below economists’ forecasts. Core inflation (excludes food and energy) also decelerated, rising 4.8 percent from last June.18

Durable Goods Orders

Orders of goods designed to last three years or more climbed 4.7 percent in June, exceeding the estimate of 1.5 percent.19

The Fed

As widely expected, the Fed raised interest rates by a quarter percent point at its July FOMC meeting.

The U.S. central bank made little change to its previous statement in June, where it kept interest rates unchanged. Fed Chair Powell did not rule out on another hike at its September meeting but emphasized that decisions would remain data dependent.20

"I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted,” said Powell after the Fed’s July meeting. “And I would also say it’s possible that we would choose to hold steady, and we’re going to be making careful assessments, as I said, meeting by meeting."20

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