Equities gave back some ground in August as interest rates stayed up and concerns over China, once mostly in the background, gained increasing urgency. By August 13, stocks had fallen -2.7% as measured by the S&P 500, though they remain solidly ahead on the year, up 16% (Wall Street Journal, August 13). A late month rally mitigated losses, but all three major indexes closed August solidly in the red with the S&P off -1.77%, the Dow Jones down -2.36%, and the Nasdaq declining -2.17%, its worst month since December.
This downturn came in spite of the fact that earnings were generally ahead of expectations, as reported by FactSet, with over 79% of S&P 500 companies surprising to the upside (99% reporting). Year-over-year, earnings were down, however, off -4.1% for 2Q, the second straight quarter of declines (FactSet, Sept. 1).
Fed policy and inflation were again in focus as interest rates continued to ratchet higher. The Central Bank bumped up its target rate by a quarter point from 5.25% to 5.50%, the highest level in 22 years (Bloomberg, August 16). The yield on 10-year treasuries reached a 15-year high of 4.258% at mid-month. Meanwhile, a Fitch downgrade of U.S. government debt didn’t help matters(WSJ, August 16). The climb in rates was bad for borrowers – mortgages rose to 7.09%, the highest level in 20 years (Wall Street Journal, August 17) – but good for savers as yields on many instruments rose above five percent. Higher U.S. rates were also good for the U.S. Dollar as it gained 1.73% in August, largely offsetting the losses seen in June and July.
China’s real estate market continued to raise alarms. As The New York Times reported, “Major developers are faltering as they face huge losses, struggle with mountains of debt and miss payments to lenders. A long-running building boom that propelled China’s growth has come to a halt, threatening the jobs and savings of millions of households (New York Times, August 21).”
By one estimate, (cited by The Times), unpaid bills from private Chinese developers hit around $390 billion. Asian stocks mostly reacted negatively to this news. Hong Kong’s Hang Seng Index continued its year-long decline and by the third week of August was down more than 20%, officially entering bear market territory (New York Times, August 21).
Back in the U.S., inflation appeared to be getting slowly under control. The Consumer Price Index (CPI) rose 3.2% annualized in July, up from 3.0% the month before; the more closely watched core prices were down slightly, rising 4.7% for July compared to 4.8% in June. More significantly, the month to month increases eased, with core CPI up just 0.2% in both June and July (Wall Street Journal, August 10).
July’s jobs number came in at 187,000 new positions, while the gain for June was marked down to 185,000. Both were well below last year’s average of 400,000. The unemployment rate came in at 3.5%, down from 3.6% in June and near a half-century low. Average hourly earnings grew 4.4% in July from a year earlier, the same rate as in June (Wall St. Journal, August 4).
There’s been more than a little discussion of an artificial intelligence (AI)-driven bubble in the market in a year where technology stocks have helped propel the rally. In an otherwise disappointing month, Nvidia, an AI chip maker and the best performer in the S&P 500 as of August 23, topped the trillion dollar market cap level (Wall Street Journal, August 23). The company’s sales for the quarter more than doubled to a record $13.52 billion.
For “soft landing” advocates, August ended on a hopeful note as the Commerce Department reported an 0.8% jump in July consumer spending, up from an upwardly revised 0.6% in June and the best since January (Wall Street Journal, Sept. 5). Both optimists and pessimists head into the fall months seeing their respective prognostications playing out across a variety of data points.