Trademark Financial Market Update – August 23, 2023
1) The US dollar continues to rise, suggesting a “risk-off” approach for global markets (and risk assets in general). Beyond that, the period from the last ten days of August through the first three weeks of September tends to be very weak. Now, in any environment at least some sectors will perform decently but that said, there are environments in which investors should focus on loss reduction, not capital appreciation. These periods give you a chance to figure out what you’d like to own if the price was reasonable, and you wait for prices to fall into your range.
2) The upcoming summit at Jackson Hole, Wyoming (August 24-26) and Nvidia’s upcoming earnings announcement (August 24) are what is moving the market right now. On the former, the market wants confirmation that Fed chairman Powell would respond to declining inflation by cutting rates next year. Of course, Powell doesn’t want to promise anything. He has been largely successful in curbing inflation without causing a recession so far, so he is not likely to feel too concerned with Wall Streeters demanding lower rates. His “Achilles Heel” at this point is the financial sector. He doesn’t want to put any more stress on banks which are already reeling from higher deposit costs and the deteriorating value of their assets (loans, bonds, and mortgages written during lower yield periods). That is really the only thing that could force him to do something he doesn’t want to do. As for Nvidia, all I can say is that north of $460 (55 times next year’s earnings), its earnings and forward guidance need to be WAY better than expected.
3) I’ve been asked why bond yields are rising at the same time inflation is coming down. There are a couple of reasons:
- As of August 16th, The Atlanta Federal Reserve’s GDPNow model estimate for real GDP growth in the third quarter of 2023 is 5.8 percent, up from 5.0% on August 15th. This is way ahead of expectations and if it holds, absolutely prevents the Fed from cutting rates (lest inflation be re-ignited).
- The U.S. Treasury has increased the amount to be borrowed in upcoming Treasury auctions, especially at the longer end of the maturity spectrum, as a result of the growing debt and the cost of servicing it. Fitch downgraded U.S. government debt from AAA to AA+. It is likely that over time this means debt funding costs will rise, but more importantly, the more the U.S. government borrows, the less savings will remain for other borrowers to compete over. Since debt is usually priced at a spread over Treasuries (theoretically the safest debt), private borrowers will be forced to pay higher interest rates.
At the end of the day, it will be harder for rates to come down absent a real economic crisis, and any meaningful rate cut due economic weakness is unlikely to be maintained for long.
4) The average Chinese stock is off just under -13% this month. This is twice the average loss of EM ex-China. Latin America is down -7%, but India is only off -2.5%. Europe is off -5.5% and Japan -5%. Global investment composites may well be underweight India, given its growth and strong relative performance.
5) We keep being told by investment strategists that high yield debt is unattractive because spreads over Treasuries are on the narrow side historically and the economy is bound to deteriorate under the weight of high interest rates and reduced Fed liquidity. Meanwhile, high yield and floating rate below investment grade debt continue to over-perform dramatically. The iShare High Corporate Bond ETF, HYG, is up 4.20% YTD, while AGG has gone negative (-0.04%). If high yield bonds are essentially a hybrid of stocks and bonds, in this environment high yield debt may, and probably should, draw money away from both bonds and stocks.
 As of market close on 8/22/23. Source: YCharts.com
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