Economic Update 7-31-2023 

• Economic news for the week included the U.S. Federal Reserve raising interest rates by another quarter percent, Q2 GDP growth that came in stronger than expected, as did durable goods orders and consumer sentiment. 
• Global equities gained for the week, with positive economic news and improved inflation readings. Bonds were generally negative, as interest rates ticked higher along with central bank hawkishness about potential future hikes. Commodities were mixed, with oil prices up 5%. 

U.S. stocks ended the week mixed to higher, with a bit uncertainty in direction following the Fed’s decision to raise rates, strong U.S. GDP growth, durable goods and consumer sentiment results that defy worries about a potential recession, as well as decent corporate earnings and falling PCE inflation. The S&P 500 has risen by 30% from a low point in October, now well above the closely-watched 50-day and 200-day moving averages. From a technical standpoint, this represents a bull market. However, other technical signals, such as near-term relative strength, point to a potentially overbought condition. This isn’t unusual, nor would be a short-term pullback at this point (just to keep expectations in check). 

By sector, communications led the way, up 7%, with solid contributions from Alphabet and Meta Platforms based on earnings results, followed by gains in materials and energy. Typical defensive sectors utilities and health care lagged with negative returns. Real estate also fell by -2% along with higher interest rates. 

In regard to Q2 earnings, 50% of S&P firms have now reported, with 80% of these showing a surprise, and nearly two-thirds showing a surprise in revenues, per FactSet. The index-wide year-over-year blended earnings change (the companies that have reported plus upcoming estimates) has worsened a bit from -7.0% at quarter-end to -7.3%. These included upgrades for consumer discretionary, communications, and industrials, while energy, materials, and health care have fared worse than first expected. ‘Growth’ sectors have tended to be the best performers, while valuations have certainly reflected those strong fundamentals. As might be expected, companies with over 50% of their revenues originating from the U.S. have actually seen positive earnings growth year-over-year, while companies with the higher proportion to international growth have seen blended earnings fall by -21%. The forward P/E on the S&P 500 has risen to 19.4x now, which is above average compared the 17.4x of the last decade, but also a reflection on the decline in inflation over the past several months. Lower inflation tends to boost earnings ratios higher, all else equal. 

Foreign stocks eked out small gains on the week in developed markets, while emerging markets rose sharply. As in the U.S., the ECB raised their key interest rate by 0.25% to 3.75%, also the highest level in decades. Here, too, inflation concerns have driven policy higher, despite more concern over industrial slowing, particularly in Germany. The path in Europe between growth and recession is far narrower, with recent GDP data showing a few tenths on either side of zero. The Bank of Japan was also in the news, as they relaxed their 10-year interest rate target band, at 0.0% +/- 0.5%, referring to it more as a looser reference point than a limitation (implying they could allow long-term rates to gradually rise). This was largely due to their strict policy over the past decade to keep rates well contained, although higher inflation has added pressure to this last country to keep rates at ultra-low levels. 

Emerging markets were led by Chinese stocks rising over 6%, in response to signals of further government support to bolster the economy, including the troubled real estate sector. Chile was the first emerging market to cut rates last week, by 1.00% to 10.25%, as inflation has already fallen by half to 7.6%. By itself, this normally wouldn’t be newsworthy, but Chile is part of a group of emerging market nations in Latin America and Eastern Europe which were the first to hike starting in summer 2021, but have since begun the process of potentially reversing course. Interestingly, most of these nations are not in or near full recession necessarily, aside from some labor stress, which would often coincide with rate cuts. 

Bonds declined last week broadly, as interest rates ticked higher across the yield curve. Corporate credit, particularly high yield, fared better than governments; floating rate bank loans ended in the positive. Developed market foreign bonds were held back by a stronger U.S. dollar, while emerging market debt prices rose along with pro-risk sentiment. 

Commodities were led by gains in energy and industrial metals, offsetting weaker prices for agriculture and precious metals. Crude oil rose over 4% last week to $81/barrel, along with a falling rig count and hopes for Chinese stimulus. This offset a drop in natural gas prices.

Period ending 7/28/2023	1 Week %	YTD %
DJIA	0.66	8.24
S&P 500	1.03	20.47
NASDAQ	2.03	37.43
Russell 2000	1.09	13.45
MSCI-EAFE	0.92	15.12
MSCI-EM	2.85	11.02
Bloomberg U.S. Aggregate	-0.40	1.89

 

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
7/21/2023	5.50	4.82	4.09	3.84	3.91
7/28/2023	5.52	4.87	4.18	3.96	4.03

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.