Gotrade Monthly Recap: August 2023
Introduction
Wall Street is currently experiencing a difficult month. The S&P 500 has fallen over 3% and is on track to end a five-month winning streak. The broader market index is also on track to record its lowest monthly performance since December 2022 when it lost 5.9%. The Nasdaq Composite is also facing its largest one-month loss since December and has decreased by 5.2%, while the Dow Jones Industrial Average has dropped by 3% in August.
This is a sharp contrast from the market rally earlier this year, where the Nasdaq Composite had its best first-half performance in 40 years, and the S&P 500 saw its best start to a year since 2021.
In last month's market update, we noted the unstable market conditions and how gains one week can be followed by losses the next. This has been happening in recent months. While we won't focus solely on July, it's impossible to talk about August without considering July.
July was a mostly positive month for investors. Most equity markets posted positive returns, and fixed income investments like gilts and corporates saw a modest positive return. Developed market equities gained around 2%, while emerging market equities, especially China, yielded investors a 5% to 10% gain.
However, things changed in the first half of August. We saw broad declines, with emerging markets and technology companies suffering the most. In China, the gains from last month were erased. But despite the volatility, an allocation to China was still a net positive against other developed markets (fig 1). The region is still up 15% since its low in November of last year.
Several factors are currently pressuring Wall Street, including seasonal factors, concerns about the global economy, and the Federal Reserve. Below is a breakdown of the current situation.
Global Equity Performance – 30/06/2023 – 16/08/2023 (fig 1)*
Key Takeaways
The S&P 500 has decreased by over 3% this month and is on track to end a five-month period of growth.
The overall market index is currently on course to record its weakest monthly performance since December 2022, where it experienced a 5.9% decline.
This is typical behaviour for this time of the year.
August — historically a tough month
The market downturn has multiple causes, making it hard to attribute the market response to a single event. One of the contributors was the unexpected downgrade of the US debt by Fitch, which drew attention to the sharp rise in the US budget deficit. Although earnings on large tech companies have been positive, given the sharp rise in these stocks this year, this was arguably the minimum required to justify the gains.
In August 2023, investors focused on inflation. Developed markets saw no big surprises, but the Chinese data sparked a wave of headlines proclaiming a slide into deflation. In reality, the numbers were somewhat less worrying. Pork prices were a significant factor behind the 0.3% drop in consumer prices versus a year earlier, and core inflation rose in July to 0.8% and remains in the 0.5-1% range of the past year.
Although the post-COVID economic rebound has been underwhelming, Chinese growth still looks set to be around 5% this year, compared with no more than 2% in the US and a meager 0.5-1% in the Eurozone and UK. High youth unemployment and the absence of inflation mean that the authorities should continue introducing further piecemeal stimulus measures. Analysts remain optimistic on Chinese equities as their valuations are low and seem to be pricing in too pessimistic an economic outlook. Analysts also like emerging markets more generally because valuations are cheap, particularly relative to the US, and interest rates look set to be cut sooner and faster than in the developed world.
The market tends to perform poorly in August for a few reasons:
Trading volumes are lower: As traders and investors take vacation before the summer ends, trading tends to decrease in August. This can result in more price swings and volatility.
Profits are booked before September: August may be a challenging month for Wall Street, but September is even worse. Historically, September is the market's worst month. Over the past 20 years, the S&P 500 has averaged a loss of 0.5% in September. Over the past 10 years, the S&P 500 has fallen by an average of 1% each September.
Corporate Earnings, Inflation, Interest Rates
Some stock market analysts are pessimistic about the market's performance in the next six months. Mike Wilson, chief U.S. equity strategist at Morgan Stanley, predicted that the S&P 500 will decrease to 3,900 by the end of the year. This is because he believes that S&P 500 corporate earnings could drop 16% this year to a cumulative $185, whereas the FactSet consensus predicts growth of nearly 2%.
If you apply a price-to-earnings ratio of 20 times Wilson's earnings estimate, you'll get a target of 3,700 by the end of December, indicating a more than 15% decrease from current levels. This would qualify as an intermediate-level correction.
However, more recent earnings forecasts as of August 17 show that the consensus forecast for S&P 500 operating earnings stands at $220.48, up from $219.43 on August 10, according to Yardeni Research. The 2024 forecast calls for $246.42 as of August 17.
Currently, the S&P 500 is trading at 18 times expected 2024 earnings, which is not considered cheap.
Inflation and interest rates are important factors in the market outlook. The Fed decided not to raise the fed funds rate from a 5%-5.25% target range in its June 13-14 meeting, but other central banks recently decided to continue with rate hikes. Fed chief Jerome Powell signaled more monetary tightening in the U.S. in the pipeline during testimony to Congress last week.
One More Rate Hike To Go In 2023?
According to CME FedWatch, the probability of the Fed raising the fed funds rate by 0.25% to a range of 5.5%-5.75% at its September 20 meeting is currently low at 13.5%. However, this likelihood has increased to 34% by the November 1 meeting and 33% by the final gathering on December 13.
Although the June U.S. jobs report showed that the labor market remains tight and non-farm payrolls continue to grow, recent data on June consumer prices eased some concerns that the U.S. central bank will continue to hike rates sharply during the back half of 2023. The prices rose by 3% year over year, down from a 4% lift in May, while core prices rose 4.8%, down from 5.3% in the prior month.
The July jobs report indicated a lingering low level of unemployment at 3.5%, down from 3.6% in June. However, payroll only grew by a net 187,000 jobs, which is below the Econoday consensus estimate for 200,000.
The government announced earlier in August that U.S. GDP rose 2.4% at an annualised rate, based on the first reading of economic data. This followed a final reading of Q1 growth of 2%. These figures are helping maintain the possibility of a new rate hike.
Meanwhile, new U.K. inflation figures showed higher-than-expected 8.7% year-over-year growth for May consumer prices, with inflation rising 0.6% month over month. The figures suggested that monetary tightening across the world may continue, which is bearish news for the stock market forecast. In June, U.K. inflation cooled off a bit, rising 7.9% for the lowest increase since March 2022.
Stock Market Forecast: Repeat Of Stagflation 1970s?
From the early 1970s to the early 1980s, the Federal Reserve had to reduce the money supply twice to control inflation. Currently, stocks have rebounded because inflation is decreasing, after reaching a peak of 8% YoY increase in consumer prices in the US during last summer. In May, consumer prices rose by 4% YoY, which is the smallest 12-month increase since March 2021.
However, some market strategists believe that even if the Fed increases the cost of borrowing for the largest banks, it could lead to economic contraction and an abrupt end to the strong run in stocks.
"We think that some members of the Fed may not stop until the seemingly resilient job market weakens and results in a recession," Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management, wrote in comments sent to IBD.
The question is whether the Fed will repeat history.
On February 1st and March 22nd, the Federal Reserve raised interest rates to lower inflation. This year, the central bank has successfully achieved that goal. However, on May 3rd, the Fed raised short-term rates by a quarter point for the third time in 2018. There are several questions that remain:
Has the Fed raised rates too quickly, which could harm the economy in the coming months?
If the Fed keeps the fed funds rate high for an extended period, how will it impact stocks?
How much will a slower economy hurt stocks?
In a recent article entitled "Long & Variable Lags," economist Ed Yardeni of Yardeni Research highlighted a curiosity of 2023: "Tighter credit conditions after the banking crisis (seen in March) have not triggered a widespread credit crunch."
Analysts’ Pick
Choosing one top stock from each of the 11 sectors in the S&P 500 is often seen as a party trick. Analysts who earn millions annually typically focus on just one sector, and even CNBC's market expert Jim Cramer finds it challenging to keep track of all the stocks within the vast U.S. economy.
The stocks listed below were selected from either Goldman Sachs' "Conviction List," which includes their "most differentiated" analyst recommendations, some of which are considered contrarian, or from a list created by CFRA Research stock strategist Sam Stovall, who surveyed the firm's analysts. Both lists were created with a 12-month timeframe in mind.
The following stock picks align with common themes such as "bouncing back" and "climate change." These picks are influenced by factors such as efforts to promote renewable energy, building efficiency, and electric vehicles. Some picks aim to take advantage of the recovery from the COVID-19 pandemic, while others aim to avoid negative aspects of the post-pandemic economy, such as high office building vacancies and higher interest rates. One of the picks claims to have recently benefited from America's culture wars. See below for the some stock picks based on market sectors:
Consumer Discretionary: Uber Technologies Inc. (UBER) - 80.7% YTD (up to 24 Aug 2023)
Energy: First Solar Inc. (FSLR) - 16.4% (up to 24 Aug 2023)
Financials: American Express Co. (AXP) - 7.9% (up to 24 Aug 2023)
Health Care: HCA Healthcare Inc. (HCA) - 14.1% (up to 24 Aug 2023)
Industrials: Johnson Controls International PLC (JCI) - -7.7% (up to 24 Aug 2023)
Information Technology: Salesforce Inc. (CRM) - 55% (up to 24 Aug 2023)
Materials: Albemarle Corp. (ALB) - -12.1% (up to 24 Aug 2023)
Real Estate: Prologis Inc. (PLD) - 9.6% (up to 24 Aug 2023)
Conclusion
To summarise, July was good for investors and how they felt about investing. But in August, a lot of uncertainty has made them feel less confident. We think this kind of up-and-down is going to keep happening. It might worry investors in the short term, but there will be chances for people who invest for a long time. Those opportunities might be in places that haven't been popular recently, so it's important to have a mix of different kinds of investments. That way, you can keep your risks low in the short term but still be open to chances in the future.
Source: Fidelity, IBOSS Asset Management, CNBC, Vanguard, Investor’s Business Daily, US News
https://www.ibossam.com/august-2023-a-raft-of-uncertainty/
https://advisors.vanguard.com/insights/article/series/market-perspectives#united-states
