Global Markets Retreat in August

Stock markets in the U.S. and around the world declined in August, led by the smaller-cap names, which incidentally led stock market gains in July. The end of the month did see markets stage a decent rally, but the mini-rallies were not enough to overcome too many negative days throughout the month.

Further, the performance difference between the blue-chip, mega-cap names of the 30-stock DJIA versus the large-cap, tech names of NASDAQ continued to widen in August, further pushing the YTD differences to a very large gap – as NASDAQ is up over 35% YTD whereas the DJIA is up about 5% YTD.

For the month of August:

• The DJIA retreated 2.6%;
• The S&P 500 lost 1.5%;
• NASDAQ declined 1.7%; and
• The Russell 2000 dropped 4.7%.

In keeping with U.S. markets, performance in developed markets outside the U.S. in August was dismal too – as every one of the 38 developed markets tracked by MSCI was negative. Performance in the emerging markets tracked by MSCI was just as bad, with 45 of those 46 indices declining in August.

The themes that drove market performance in August once again centered around inflation, the Fed, retail sales, housing and the labor market, with recent numbers leaving Wall Street guessing as to whether the Fed might pause its rate-hiking path for the rest of the year.

Volatility, as measured by the VIX, trended down overall in August, beginning the month above 14 and ending the month under 14, although we did see a couple of spikes late in the month.

West Texas Intermediate crude was flat this month, losing about 16 cents a barrel and coming to rest at $83.64/barrel at month-end, with a fairly consistent rise in daily prices during the last week in August.

Market Performance Around the World

Investors looking outside the U.S. saw rotten performance, as all 38 of the developed markets tracked by MSCI retreated this month – with the majority losing more than 4%.

Performance for emerging markets was just as dismal, with 45 of the 46 indices retreating for the month – with 32 losing more than 5%.

Sector Performance Mostly Negative

For the month of August, sector performance was almost entirely negative, save for the Energy sector which rose more than 3%. Contrast August’s poor performance with the month of July and you see two very different stories, as sector performance was red hot in July, with all 11 S&P 500 sectors advancing.

For a longer-term perspective, July’s sector performance was a continuation of June’s, which also saw all 11 S&P 500 sectors gain ground. Contrast that with May, which say 8 of the 11 lose ground, July was much more in line with the month of April (and June), when all 11 S&P 500 sectors advanced then too.

In addition, for August, the range in sector-returns was decently wide relative to previous months, with Energy up over 3% and Materials down almost 6%.

And if you look carefully, investors will notice that there were a few big swings within sectors in just a month, as Communication Services went from up almost 8% to down about 1% in just one month.

That’s volatility.

Here are the sector returns for the month of August and July (two very short time-periods):

GDP Up 2.1% in Second Quarter

On the last day of the month, the Bureau of Economic Analysis reported that real gross domestic product increased at an annual rate of 2.1% in the second quarter of 2023 , according to its “second” estimate. In the first quarter, real GDP increased 2.0%.

“The increase in real GDP reflected increases in consumer spending, nonresidential fixed investment, state and local government spending, and federal government spending that were partly offset by decreases in exports, residential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Compared to the first quarter, the acceleration in real GDP in the second quarter primarily reflected a smaller decrease in private inventory investment and an acceleration in nonresidential fixed investment. These movements were partly offset by a downturn in exports, and decelerations in consumer spending and federal government spending. Imports turned down.”

Retail and Food Services Sales Advance

The advance estimates of U.S. retail and food services sales for July 2023 were $696.4 billion, up 0.7% from the previous month, and up 3.2% above July 2022. In addition, total sales for the May 2023 through July 2023 period were up 2.3% from the same period a year ago.

Further

• Retail trade sales were up 0.6% from June 2023, and up 2.0% above last year.
• Nonstore retailers were up 10.3% from last year.
• Food services and drinking places were up 11.9% from July 2022.

Existing Home Sales Decline as Rates Rise

The National Association of Realtors announced that existing-home sales receded in July. Among the four major U.S. regions, sales grew in the West but faded in the Northeast, Midwest and South. All four regions registered year-over-year sales declines.

Total existing home sales completed transactions – that include single-family homes, townhomes, condominiums and co-ops – waned 2.2% from June. Year-over-year, sales slumped 16.6%.

• Total housing inventory registered at the end of July was 1.11 million units, up 3.7% from June but down 14.6% from one year ago (1.3 million).
• Unsold inventory sits at a 3.3-month supply at the current sales pace, up from 3.1 months in June and 3.2 months in July 2022.
• The median existing-home price for all housing types in July was $406,700, an increase of 1.9% from July 2022 ($399,000).
• Properties typically remained on the market for 20 days in July, up from 18 days in June and 14 days in July 2022.
• Seventy-four percent of homes sold in July were on the market for less than a month.

30-Year Mortgage Rates Up Over 7%

According to Freddie Mac, the 30-year fixed rate mortgage averaged 7.18% as of the end of August. That’s up from 6.96% the prior week and 5.13% one year ago.

Single-family and Condo/Co-Op Sales Down

Single-family home sales slid in July, down 1.9% from June and 16.3% from the previous year. The median existing single-family home price was $412,300 in July, up 1.6% from July 2022.

Existing condominium and co-op sales also slid in July, down 4.5% from June and 19.2% from one year ago. The median existing condo price was $357,600 in July, up 4.5% from the previous year ($342,200).

Regional Breakdown

• Existing-home sales in the Northeast descended 5.9% from June to an annual rate of 480,000 in July, down 23.8% from July 2022. The median price in the Northeast was $467,500, up 5.5% from one year ago.
• In the Midwest, existing-home sales decreased by 3.0% from the prior month to an annual rate of 960,000 in July, dropping 20.0% from the previous year. The median price in the Midwest was $304,600, up 3.9% from July 2022.
• Existing-home sales in the South retracted 2.6% from June to an annual rate of 1.86 million in July, a decrease of 14.3% from one year ago. The median price in the South was $366,200, up 1.7% from July 2022.
• In the West, existing-home sales increased 2.7% from the previous month to an annual rate of 770,000 in July, down 12.5% from the prior year. The median price in the West was $610,500, unchanged from July 2022.

Durable Goods Orders Down in July

Durable goods orders declined 5.2% month-over-month in July. Excluding transportation, durable goods orders increased 0.5% month-over-month.

Further:

• New orders for transportation equipment declined 14.3% after increasing 11.9% in June, paced by a 43.6% drop in new orders for nondefense aircraft and parts.
• New orders for primary metals increased 0.1% on the heels of a 0.2% increase in June.
• New orders for fabricated metals products rose 0.7% after increasing 1.0% in June.
• New orders for machinery increased 1.1% after declining 0.6% in June.
• New orders for computers and electronic products dipped 0.1% following a 1.2% increase in June.

Consumer Sentiment Stays Put

The University of Michigan reported that “consumer sentiment was essentially unchanged from July, with small offsetting increases and decreases within the index. At 71.2 index points, sentiment is now about 42% above the all-time historic low reached in June of 2022 and is approaching the historical average reading of 86. In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago.

Year-ahead inflation expectations edged down from 3.4% last month to 3.3% this month, showing remarkable stability for three consecutive months. The current reading remains above the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations also remained stable at 2.9%, again staying within the narrow 2.9-3.1% range for 24 of the last 25 months. These expectations are elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.”

Job Openings Decline in July

The number of job openings edged down to 8.8 million on the last business day of July, the U.S. Bureau of Labor Statistics reported. Over the month, the number of hires and total separations changed little at 5.8 million and 5.5 million, respectively. Within separations, quits (3.5 million) decreased, while layoffs and discharges (1.6 million) changed little.

Job Openings

• On the last business day of July, the number of job openings edged down to 8.8 million (-338,000), while the rate changed little at 5.3%.
• Over the month, job openings decreased in professional and business services (-198,000); health care and social assistance (-130,000); state and local government, excluding education (-67,000); state and local government education (-62,000); and federal government (-27,000).
• By contrast, job openings increased in information (+101,000) and in transportation, warehousing, and utilities (+75,000).

Leading Indicators Down Again for the 16th Month in a Row

The Conference Board Leading Economic Index for the U.S. declined by 0.4% in July 2023 to 105.8 (2016=100), following a decline of 0.7% in June. The LEI is down 4.0% over the six-month period between January and July 2023 – a slight deterioration from its 3.7% contraction over the previous six months (July 2022 to January 2023).

“The US LEI – which tracks where the economy is heading – fell for the sixteenth consecutive month in July, signaling the outlook remains highly uncertain. On the other hand, the coincident index (CEI) – which tracks where economic activity stands right now – has continued to grow slowly but inconsistently, with three of the past six months not changing and the rest increasing. As such, the CEI is signaling that we are currently still in a favorable growth environment.

However, in July, weak new orders, high interest rates, a dip in consumer perceptions of the outlook for business conditions, and decreasing hours worked in manufacturing fueled the leading indicator’s 0.4 percent decline. The leading index continues to suggest that economic activity is likely to decelerate and descend into mild contraction in the months ahead. The Conference Board now forecasts a short and shallow recession in the Q4 2023 to Q1 2024 timespan.”

• The Conference Board Coincident Economic Index for the U.S. improved by 0.4% in July 2023 to 110.5 (2016=100), after no change in June. The CEI is now up 0.7% over the six-month period between January and July 2023 – down slightly from the 0.9% growth rate recorded over the previous six months.
• The Conference Board Lagging Economic Index for the U.S. was unchanged in both July and June of 2023, at 118.3 (2016 = 100). The LAG is up slightly by 0.1% over the six-month period from January and July 2023, down dramatically from its 2.5% growth over the previous six months.

Sources

bea.gov;bls.gov ;census.gov;umich.edu;nar.realtor;confernce-board.org;fidelity.com;msci.com;nasdaq.com;wsj.com; morningstar.com;

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