MARKET RECAP

Fitch downgraded US debt to AA+ from AAA a couple of weeks back. Fitch said the downgrade was due to an “erosion of governance” in the US compared to other top-tier economies over the last two decades. The Biden administration and many “experts” said the downgrade was undeserved and nonsense. Treasury Secretary Yellen said, “The change by Fitch Ratings announced today is arbitrary and based on outdated data.” But in all seriousness, who can argue with the downgrade?

Look what is going on in this country:

• For the first time in our history, we did not have a peaceful transfer of power after the 2020 election.
• The last President has been indicted multiple times and still insists the last election was stolen, and many people actually believe him.
• We have gone to the brink several times when renewing the debt limit.
• Trump added $6.7 trillion in debt from fiscal year 2017 to fiscal year 2020, an increase in the national debt of 33% in four years. At the end of fiscal year 2020, the national debt was $26.9 trillion.
• Under Biden, in January of 2023, the national debt hit $31.4 trillion.
• The cost of refinancing the debt at higher interest rates is going to compound the problem.
• Spending is just out of control, and hardly anyone cares.

So the downgrade was well deserved and should probably have been deeper.

SCOREBOARD

July 2023: Market Basking in Summer Sun, But Whispers of Autumn Chill the Air

July 2023 brought continued sunshine to financial markets, extending the gains of June, but whispers of cooler autumn winds started to ruffle investor confidence. Here’s a closer look at the key themes:

Equity Market Resilience:

• Major indices climbed for the fifth consecutive month, defying some earlier worries about a second-quarter earnings recession.
• The S&P 500 rose 3.2%, marking its longest sustained rally since August 2021. The Dow Jones climbed 3.4%, and the Nasdaq Composite gained 4.05%.
• Small-cap and micro-cap stocks outperformed mega-caps, reversing the recent trend.

Earnings Beat and Economic Data Uptick:

• Corporate earnings largely beat expectations, with the average EPS surpassing forecasts by 5.7%.
• Economic data was generally positive, with stronger-than-expected GDP growth and job numbers.
• Lower inflation in several developed markets, including the US, boosted optimism for a soft landing scenario despite the Fed’s continued rate hikes.

Shifting Risk Appetite:

• Despite positive numbers, some investor groups turned cautious. Bearish institutional investors started capitulating, indicating potential waning enthusiasm for equities.
• Fixed-income markets saw a modest decline in government bonds, while corporate bonds outperformed.

Sector and Regional Differences:

• Energy was the best-performing sector, benefiting from improved demand and supply constraints.
• Consumer discretionary stocks also did well, fueled by positive economic data and earnings reports.
• Foreign developed equity markets slightly outperformed the US in July, with the MSCI EAFE leading the S&P 500. Emerging markets surged almost 6.3%, showcasing their strong comeback after previous slumps.

Other Notable Events:

• The Federal Reserve raised rates by another 25 bps, bringing the benchmark rate to 5.25-5.50%, and hinted at slowing the pace of future hikes.
• The US Treasury yield on the 10-year note briefly topped 4.0% but ended July at 3.954%.
• Geopolitical tensions remained elevated, with the war in Ukraine and US-China relations presenting uncertainties.

Overall, July 2023 was a positive month for financial markets, but the optimism was tempered by concerns about future Fed actions and potential headwinds in the second half of the year. The upcoming months will be crucial in determining whether the summer rally can hold its heat or if the whispers of autumn chills become a reality.

MARKET RECAP

It was another big week for stocks as US markets advanced by 2.71% and a super strong 3.91% outside the US. Bonds were up 1.46% as interest fell on a good inflation report.

The market appears to be broadening out, the equal-weighted S&P 500 has doubled the S&P 500 performance over the last six weeks, 6% v 3%. The S&P 500 trades at 18.9x earnings, but when you back out the seven leaders (that trade at 40x), the index trades at 15x. Meanwhile, quarterly earnings are expected to drop for the third quarter.

The market appears overbought. 83% of S&P 500 stocks are above their 20-day exponential moving average, 82% are above the 50-day, and 71% are above the 200 day. Two of the last times stocks were at similar metrics, greater than 80/80/70, led to sell-offs. From February 1, 2023, to March 13, the market fell by 6.4%. Prior to that, the other time was at the end of 2021, which turned out to be the last peak of the S&P 500. The market would fall by about 25% over the next ten months.

MARKET RECAP

MARKET RECAP

After a big June where US stocks advanced by  6.73%, stocks were flat this week, +0.01%, while international markets fell slightly, down by 0.36%. Bond took a big loss of 0.96% on higher interest rates. The yield on the 1-year treasury was up by 24 basis points.

The market no longer anticipates a drop in interest rates this year and is counting on a rate increase at the next meeting in late July. Despite falling just shy of the consensus for nonfarm payrolls, the payroll report that came out this week still reflected a solid labor market, thereby putting to rest the chance for a near-term pause in interest rate increases. Payrolls increased by 209,000; the estimate was 230,000. It was the first miss after a 14-month winning streak. The two prior months were revised down by 110,000. The workweek was up to 34.4 hours from 34.3 in May, and average hourly earnings were up by 0.4%. The unemployment rate fell to 3.6% from 3.7%.

SCOREBOARD

June 2023: A Month of Sunshine for Wall Street, With Clouds on the Horizon

June 2023 painted a more vibrant picture for financial markets than the previous months. Optimism reigned, but simmering concerns remained beneath the surface. Here’s a breakdown of the key themes:

Equity Market Rally:

• Major indices enjoyed a strong month, buoyed by better-than-expected economic data and positive earnings reports.
• The S&P 500 surged 5.8%, marking its best June performance since 2019. The Dow Jones followed suit, climbing 4.5%, and the Nasdaq Composite soared 32.32%, its strongest first-half performance in four decades.
• Small-cap and mid-cap stocks outperformed, playing catch-up with large tech companies that had dominated earlier in the year.

Economic Resilience:

• The US economy displayed surprising resilience, with GDP growth increasing to 2.0% for the first quarter.
• Consumer confidence improved, and initial jobless claims declined, fueling hopes for a continued economic recovery.
• However, worries remained about the sustainability of this growth, especially with rising interest rates and ongoing supply chain disruptions.

Central Bank Tightrope Walk:

• The Federal Reserve maintained its 0.25% rate hike pace but signaled the possibility of future increases depending on inflation data.
• This cautious approach balanced inflation control with concerns about stifling economic growth.

Sector Rotation and Commodity Recovery:

• Value stocks continued to outperform growth, with consumer discretionary leading the charge.
• Technology stocks still performed well, but the pace of their gains slowed compared to earlier months.
• Commodity prices rebounded slightly, with oil prices edging higher amid concerns about potential OPEC output cuts.

Global Market Performance:

• International markets underperformed the US, with the MSCI EAFE and MSCI EM returning less than the S&P 500.
• This highlighted the uneven global economic recovery and different monetary policy stances adopted by central banks.

Other Notable Events:

• The war in Ukraine continued to impact energy prices and disrupt supply chains.
• Geopolitical tensions between the US and China remained high, adding to market uncertainty.
• Investor focus shifted towards the upcoming mid-term elections in the US and their potential impact on economic policies.

Overall, June 2023 was a month of positive gains for financial markets, driven by improving economic data and strong corporate earnings. However, clouds of uncertainty continued to linger, fueled by concerns about inflation, rising interest rates, and geopolitical tensions. The second half of the year will be crucial in determining whether the optimism of June can persist or if underlying anxieties take hold.

SCOREBOARD 6/16/2023

MARKET RECAP

US stocks had a breakout week, up by 3.43% and moving up through resistance. Despite all the bad news out there, stocks continue to push higher.

Washington managed to make a deal to save the country from default. Of course, according to Bloomberg economists Anna Wong and Maeva Cousin, it will barely make a dent in the continued disastrous trajectory of US debt, estimated to rise from 97% of GDP to 130% by 2033.

Biden signed the debt deal into law on Saturday, meaning a tidal wave of US Treasuries will come to market this week. It will be interesting to see how the market handles it.

Non-farm payrolls were up by 339,000, beating the 195,000 consensus. Bianco Research said it was the 14th consecutive monthly reading in which payrolls topped economist expectations. The prior two months were revised up by almost 100,000. The labor-force participation rate was 62.6%, the same as in May and lower than the prepandemic level of 63.3%. The average workweek fell to 34.3 hours, the lowest since April 2020.

Between the strong jobs report and the debt ceiling resolution, the Dow jumped by just over 700 points on the news, the largest one-day gain since November.

SCOREBOARD