Is this a Nail or a Screw?

Sep 6

Written By SBC Investment Management

A summary of the stock market performance:

Overall Market Performance:

The S&P 500 declined by approximately 1.6% to 1.8% in August, ending its five-month winning streak[1] [2] [3].
The Dow Jones Industrial Average fell about 2.4% [3].
The Nasdaq Composite dropped around 2.2% [3].

Sector Performance:

Energy was the only S&P 500 sector to post a gain in August, rising about 1.3% [2] [4].
Utilities performed poorly, falling more than 6.5% [2].
Consumer staples and real estate sectors also declined by over 3% [2].

Market Factors:

Concerns over China's economic slowdown and real estate crisis negatively impacted global markets [4].
Investors worried about the Federal Reserve potentially keeping interest rates higher for longer than anticipated [4].
The 10-year Treasury yield reached its highest level since 2007 during the month [4].

International Markets:

Foreign developed equity markets underperformed the U.S., with the MSCI EAFE Index falling more than the S&P 500 [2].

Emerging markets experienced a sharp decline of about 6.16% [2].

Economic Indicators:

Mixed economic data provided hope that peak interest rates might be nearing [2].
Retail sales remained resilient, rising 0.7% in July [2].
The core personal consumption expenditures (PCE) price index showed signs of moderating inflation [2].

Year-to-Date Performance:

Despite the August decline, the S&P 500 remained up over 18% year-to-date[5].
The Nasdaq was still up about 34% for the year [3].

Historical Context:

August has historically been a challenging month for stocks, with the S&P 500 averaging just a 0.1% gain over the past 10 years [4].

In summary, August 2023 saw a broad market decline, ending a period of strong gains earlier in the year. However, the overall market remained significantly positive for the year-to-date period, despite concerns about inflation, interest rates, and global economic conditions.

A summary of the bond market for August 2023:

Overall Performance:

Bond yields rose significantly during August, with the 10-year Treasury yield reaching its highest level since 2007.
The Bloomberg Municipal Bond Index returned -1.44% for the month.
Global government bonds edged lower by 0.1% (in USD, hedged terms).

Treasury Market:

The 10-year Treasury yield briefly rose to fresh cyclical highs before retracing most of its moves.
By the end of August, the 10-year Treasury yield was around 4.11%.
The yield curve steepened, as the market repriced on lower recession risk and concerns about persistent deficits and increased Treasury issuance.

Corporate Bond Market:

Investment grade (IG) corporate bond spreads widened by 5 basis points, closing August at an option-adjusted spread of 118 basis points.
Lower-quality bonds outperformed higher-quality corporates on a total return basis.
The best-performing sectors included Cable/Satellite, Media/Entertainment, and Oil Field Services.
The worst-performing sectors included Automotive, Banking, and Gaming.

Municipal Bond Market:

Municipal bond yields were higher across the curve.
New issuance was $36.5 billion, about 34% higher than July but 13% lower than August 2022.
Municipal bond mutual fund outflows were about $111 million.

Factors Influencing the Market:

Fitch Ratings downgraded U.S. sovereign debt on August 1, which initially pushed yields higher.
The U.S. Treasury announced plans to increase longer-term debt issuance through the end of the year.
Concerns about persistent inflation and the Federal Reserve potentially keeping interest rates higher for longer affected market sentiment.
Economic data showed mixed signals, with robust retail sales but softening manufacturing activity.

Federal Reserve Actions:

The Fed raised interest rates by 0.25% in late July, which influenced August market dynamics.
Fed Chair Jerome Powell indicated that future rate hikes would be data-dependent.

International Bond Markets:

Foreign developed equity markets underperformed the U.S.
Emerging markets bonds experienced significant declines.

Overall, August 2023 was characterized by rising yields across various bond sectors, driven by concerns about inflation, government debt issuance, and the Federal Reserve's monetary policy stance. The market showed increased volatility as investors reassessed economic conditions and policy expectations.

Commentary:

The numbers are still pointing towards a recession and people feel it. Consumer confidence index fell in August to 69.5, lower than March of 2020, yet higher than June 2022. The economy has continued to move between deflation and stagflation over the past 30 days. It’s almost as if it doesn't quite know what to do due to the upcoming Federal Open Market committee meeting announcements of chairman Powell, as we all know, markets do not like uncertainty. The data is pointing to a pull back for a recession, while those in place of power are talking about how good the economy is, this sends mixed messages to markets as a whole.

When I was an undergraduate student one of my economics professors explained to me that one of the problems with the federal reserve is that they have very limited tools at their disposal. While I'm sure he did not coin the phrase, it was the first time I remember, as an adult hearing, the phrase, “when the only tool you have is a hammer, every problem you come across is a nail.”

Keith McCullough gave an interview on Market Watch (Click Here for full interview)

“The Fed forecast of the probability of recession should be trusted as much as their 'transitory' inflation forecast, or a parlor game. People should not have confidence in the Fed’s forecast. The 'no-landing' or 'soft-landing' thesis is looking backward. The Fed is grossly underestimating the future, doing what they always do, in looking at the recent past.”

“Their policy is wedded to what they say. They claim they’re not going to cut interest rates until they get to their target. But any hint of the Fed arresting the tightening gives you more inflation. So there’s this perverse relationship where the Fed is the catalyst to bring back the inflation they’ve spent so much time fighting.”

Conclusion:

Are we at the brink of a pullback in both stocks and bonds, or is the market getting too many mixed signals causing it to not know which direction to turn? It is probably the latter and because of the uncertainty, our position continues to be very conservative, protecting the principal the best way possible. This defensive positioning within the satellites and core holdings has been a drag on the portfolio compared to the overall market. However, with all the uncertainty surrounding in-line economy, we're remaining conservative.

Model Performance Update

Our Moderate model portfolio returned -1.09% during the Month of August and finished the month with 1.15% Year To Date through the end of May (see charts below).

In July, Hedgeye signals identified ETFs that appear to be in areas of markets where we may start to see longer term trends develop. As mentioned in last months article, we began buying PRF, PXH, FRDM, CLE, XHE, COM and DBA. Though the markets retraced in August, these ETFs maintained their trends. As a result, we made very few changes in the month of August.

Changes to Model Portfolio during the month of August

- RAYC- Sold from all accounts 8/22/2023

August 2023 performance with benchmark

2023 Year to Date Performance with Benchmark

If you were to have any questions regarding the above, please reach out to us to set up a one-to-one meeting to review your situation.

Sincerely,

Bryant Andrus, MSF, CFP®

President

SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com

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[1]https://markets.businessinsider.com/news/stocks/stock-market-outlook-rally-crash-recession-august-wall-street-economy-2023-8

[2] https://www.cashdollarandassociates.com/p/august-monthly-report

[3] https://www.mmbb.org/personal-finance/monthly-market-summary-august-2023-1-1

[4] https://www.cnbc.com/2023/08/24/august-again-lives-up-to-its-reputation-as-a-downbeat-month-for-stocks.html

[5] https://www.adviceperiod.com/blog/august-2023-market-commentary/

Citations (Bonds):

[1]https://edition.cnn.com/2023/10/05/investing/premarket-stocks-trading-bonds-sell-rally-yields/index.html

[2]https://libertystreeteconomics.newyorkfed.org/2023/10/how-has-treasury-market-liquidity-evolved-in-2023/

[3]https://www.reuters.com/markets/rates-bonds/us-bond-yields-surge-despite-muted-inflation-investors-look-beyond-fed-2023-08-23/

[4]https://www.nytimes.com/2023/08/25/business/stock-market-august-slump.html

[5]https://www.rothschildandco.com/en/newsroom/insights/2023/09/wealth-management-monthly-market-summary-august-2023/

[6]https://www.wsj.com/livecoverage/stock-market-today-dow-jones-08-17-2023