Market Recap 8/11/2023

The broad stock market continued to correct this week, with the high-flying growth stocks bearing the brunt of the selling.  But given the run most sectors have had this year, the correction so far is modest.  The S&P is off roughly -3% in August while the NASDAQ has dipped about -5%.   Nothing crazy.  It’s a similar story in the fixed income markets.  Longer-term yields in particular have ticked higher, and long Treasuries are down about -4.6% for the month, pushing them into the red for the year.  The Aggregate index is still up YTD, but only just.  


On the surface the economic data this week should have been bullish for bonds and stocks.  After all, the closely watched consumer price index posted a smaller than expected increase in July.  Prices were up 0.2% for the month while the annual rate climbed to 3.2%.  Core prices excluding food and energy continued to drift lower, as you can see below.



Both numbers were better than economist’s expected, and the short-term outlook for inflation remains constructive.   Housing costs still added materially to the CPI in July.  Take out this component and inflation was basically unchanged for the month.  



And as we have noted before, there’s a good case to be made that housing inflation should slow in the months to come.  The growth in shelter costs slowed last month, and if rents are any indication, the slowdown should persist.  



Who’s To Blame?


So why are bond yields up and stocks down if the inflation trajectory looks constructive?   


It’s always hard to say why asset prices do what they do.  More motivated sellers than buyers is the tongue in cheek response, but that’s not too far from the truth.  If you wanted to build a narrative about why stocks are down in August, though, it might go something like this.


Oil prices – they are up.   



It might be a bit of an exaggeration to say that nothing good happens when oil prices increase, but it does raise the worry that headline inflation may not slow as much as we thought just a few weeks ago.  


Growth expectations – they are also up, big time.



Economist’s think third quarter growth will come in around +1%.  The Atlanta Fed’s current estimate is at +4.1%.  Could growth really be this strong?  If so, this could fall into the ‘good news is bad’ category because it might mean inflation bounces back in 2024.


Rate cut expectations – they are evaporating.  The market is still pricing in cuts starting in 2024, but this is looking less and less likely.  



Why does this matter?


Because valuations (blue line below) have moved significantly higher this year on the bet that rates were close to peaking out.  But if it turns out that rates are going to stay at today’s level (or move higher) all of next year, then valuations might be stretched in certain segments of the market.



(Other) Charts We Found Interesting


  1. This was released a week ago, but now two of the three big ratings agencies have downgraded Treasury bonds.


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  1. China has fallen back into deflation.  



  1. How much has the average American family saved for retirement?   Not much. 



  1. The response to rising oil prices in early 2022 was to tap the Strategic Petroleum Reserve.  It’s not clear what Plan B is.  


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  1. There’s always a bull market somewhere - Olive oil prices have doubled from a year ago.  A metric ton now costs more than 10x a metric ton of crude oil!!


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  1. Interesting chart on AI and how advances seem to be accelerating.



  1. But maybe this isn’t a recent phenomenon, but one that has been around for quite some time (since we started utilizing fossil fuels??).  For example, the newly built HMS Dreadnought passing HMS Victory in 1906, only 101 years after Trafalgar.


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Have a good weekend


Charles Blankley
Chief Investment Officer
Gemmer Asset Management LLC


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