BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
Stocks reached a year-to-date closing high on July 31st, but the S&P 500 is down about 5% so far in the month of August. The S&P 500 is still up over 14% this year. This lines up with historic seasonality, where the third year of a Presidential election cycle has been the strongest for stocks, though the third quarter of that year (current quarter) has averaged a small loss. Second quarter company results on average saw a lower sales “beat rate” but a higher earnings “beat rate”. The dampened enthusiasm for stocks may be coming from recently higher bond yields, which are providing a more attractive interest rate than has been seen in many years.
The momentum can continue: since 1928, in the 32 years where the S&P 500 was up over 10% in the first seven months of the year, the average performance for the rest of the year was a gain of 6%, with positive returns 91% of the time1. Earnings in the second quarter were lower than a year ago, marking the third straight quarter of year-over-year declines. Estimates for third quarter sales growth is currently expected to be 1.3%, while earnings growth is only expected to be 0.2%. Earnings growth for all of 2023 is only estimated to be 0.8%.2 Often the actual results are slightly lower than the forecasts.
The recent level of consumer inflation (CPI) was 3.2%, while producer inflation (PPI) was 0.8%, both a bit higher than the prior month’s reading, but both still tame compared to a year ago. We were also encouraged by the most recent monthly jobs report, which showed national unemployment at 3.5%, as well as the first reading on second quarter GDP, which showed higher growth and lower inflation than the first quarter. While we would like to see lower oil prices, even $80 per barrel oil is lower than the $90 oil seen this time last year.
The Federal Reserve raised rates again on July 26th to a new target range of 5.25-5.50%. As of this writing, the futures market is not pricing in any changes to the Fed Funds rate well into 2024. The Fed meets in Jackson Hole, WY, for three days starting August 24th, but the next rate announcement will not be until September 20th.
From TINA to TIAA: in years past when interest rates were near zero, it was said “there is no alternative” (TINA), for stocks, meaning investors felt the best chance to earn a decent rate of return was from stocks and not bonds. That narrative has now changed to TIAA: “there is an alternative”. Five-year Treasury yields, recently around 4.4%, just closed at multi-year highs, which was also true with 10-year Treasury yields around 4.3% and 30-year Treasury yields around 4.4%. Short/medium-term Treasury bonds are something we have just begun incorporating into the fixed income side of client portfolios, which has also extended portfolios’ average maturity, as we look to lock in higher rates for longer. For your short-term cash needs, we have options paying over 5% and we expect rates to remain high for the rest of 2023. If you are not receiving a competitive rate on your cash, please contact us for suggestions.
Despite the recent Fitch ratings downgrade of U.S. debt from AAA to AA+, clients may be surprised to learn that the U.S. Dollar, compared to a basket of global currencies, has strengthened in recent weeks to a level not seen since last November. This was after last year’s peak in September, where the dollar was its strongest in over 20 years.
Small Business Owners:
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Thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
1. Bespoke Research
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.