What happened in the markets - 21-25 Aug 2023

Introduction

So it's the end of August, which means back-to-school time and the start of fall. But for investors like us, it's also when we start paying attention to the Federal Reserve's Jackson Hole symposium. Basically, this is a big meeting where policymakers talk about their plans for the economy. Last year, the Fed chair gave a speech that made everyone nervous about inflation and led to some bad times for stocks and bonds. This year, the speech was still kind of cautious, but not as scary. Nothing really surprising happened, and the market didn't freak out too much.

Key Takeaways:

2% is and will remain the Fed's target – Chair Powell rejected the idea that the Fed might accept or increase its inflation target, which some academics and market participants have recently proposed. While he recognised that recent inflation reports have been lower, he emphasised that this is just the start of what is needed.
Officials are determined to keep at it until the job is done - The Federal Reserve is ready to increase interest rates further if necessary and plans to maintain high borrowing costs until inflation shows sustained progress towards the Fed's goal. This suggests that interest rates could stay elevated if data supports it. Achieving this goal may require a period of economic growth below its long-term trend, and some weakening in labor market conditions.
Stocks end mixed on mixed signals - Benchmark returns had a mixed week as investors reacted to conflicting signals on the economy and monetary policy.

Inflation and Fed policy

The rate at which prices for goods and services are increasing has decreased significantly since it reached its highest point about a year ago, when Powell gave a speech at Jackson Hole that emphasised the need to be cautious about inflation. We are seeing a slowdown in price increases across more and more categories, and we believe that this trend will continue as used car prices and housing costs start to level out. Given that the rate at which the Fed lends money is now higher than the rate of inflation, it may not be necessary for the Fed to raise rates further.

**The Fed’s policy now exceeds the rate of inflation.** ***Source: Bloomberg, EdwardJones***

During a downward trend, core inflation is almost twice the Fed's target of 2%. Policymakers underestimated how much and how long inflation would be above target, so they will probably continue to be cautious to avoid declaring victory too soon. The last stretch to reach 2%, also known as the "last mile," could be the most challenging and may require further loosening of the labor market.

The stock market closed with mixed results due to varying signals.

So, the returns on benchmark were all over the place this week. Investors were reacting to mixed signals on the economy and monetary policy. On the bright side, growth stocks did really well and outperformed value shares. NVIDIA, an artificial intelligence chipmaker, was definitely a standout thanks to a big earnings and revenue beat. Financials, on the other hand, had a bit of a rough start to the week. S&P Global downgraded its credit ratings of five regional banks, which wasn't the best news. One of the reasons for the downgrade was some stresses in the commercial real estate lending market. Not great, but hey, there's always next week!

So, a bunch of retailers announced how they did in the second quarter. And it seems like Americans might be feeling a little hesitant about spending money. Macy's, you know, that department store, said they didn't make as much money as they wanted to. And they also said that people are being extra careful with their cash, which is not great news. Nordstrom, another department store, actually did pretty well, but they're not feeling too confident either. They said they've noticed more people paying their credit card bills late. And then, there's Dollar Tree and Dick's Sporting Goods, who had some trouble with people stealing stuff from their stores. So, not the best news all around, but that's how things are looking for these retailers.

The University of Michigan just released their latest report on how people are feeling about the economy. It turns out that, compared to last month, people are feeling a little less happy about things. One reason might be that people think prices are going to go up because gas prices have gone up. But the person in charge of the study said that people still think they're going to make more money, especially people who don't make a lot of money right now. Some other news that's pretty good is that the number of people who lost their jobs last week is the lowest it's been in three weeks. So, things are looking pretty good for jobs right now.

After dipping late last year, earnings estimates are back to last August's level

So last year, corporate profits were feeling the squeeze from higher costs of materials and labor. But in the last six months, forward 12-month estimates have made a comeback and are now back to where they were in August 2021. Although earnings haven't changed much and stocks are actually higher now, valuations have grown. We reckon earnings will have to do most of the work if we want markets to go up for the rest of the year. But hey, the good news is that if everyone's on the same page, the second quarter should be the end of the earnings drought. And wouldn't you know it, S&P 500 earnings are predicted to go positive in the third quarter and make an even stronger comeback in 2024.

**Consensus expects an EPS trough before a Q3, Q4, and 2024 rebound.** ***Source: Bloomberg, EdwardJones***

Stocks on the Radar

📈 Affirm (AFRM), the company's stock increased by over 30% following the announcement of a 22% revenue growth in the last quarter. Additionally, the buy now, pay later enterprise revised its forecast for the current quarter.
📈 Gap (GPS), the stock price increased by 6% due to higher-than-anticipated quarterly earnings. However, sales figures fell below the target and the company's forecast was not as positive.
📈 Intuit (INTU) increased by 4.5% after announcing quarterly results that exceeded expectations. The financial software firm also raised its dividend by 15%.
📈 Johnson & Johnson (JNJ) gained 1.8% after separating from Kenvue (KVUE) through a stock swap, which pleased investors. Kenvue's stock was down by approximately 2%.
📉 Marvell Technology (MRVL) dropped over 6% despite beating analysts' expectations in its quarterly results. However, this marks the company's third consecutive quarterly decline in earnings.
📈 Netflix (NFLX) increased by 2.8% due to an upgrade of its shares from "hold" to "buy" by a Loop Capital analyst. The improvement of the content streamer's fundamentals was noted as the reason for the upgrade.
📉 Nvidia's (NVDA) stock fell by 2.2% after a volatile week. The chipmaker's stock surged to a record high in aftermarket trading late Wednesday following its blockbuster earnings report. However, the stock's gains were short-lived and it faded as the week ended. Despite this, the stock still ended the week up by nearly 4%.
📈 Salesforce (CRM) increased by 2.4% before its earnings report on Wednesday. According to analysts polled by Zacks, the expected adjusted profit per share is $1.90, and expected revenue is $8.52 billion. However, Oppenheimer analysts suggest that expectations may be too low.
📈 Workday (WDAY) increased by close to 6% following its report of quarterly numbers that exceeded expectations and a more optimistic forecast.
📈 Ulta Beauty (ULTA) experienced a 3.7% decrease despite having better-than-expected quarterly results, which were still slower than in the previous quarter.