Hard or Soft Landing? The Economy's Flight Path and Interpreting Economic Signals.
HWM Market Recap - August 2023
Executive Market Summary
We have all been there. After a long flight, the flight attendant announces, "We have started our initial descent," and that passengers should prepare for landing. Sometimes that landing goes according to plan – smooth and soft. Other times you white-knuckle your armrest because it is so bumpy.
You may have read or seen on the news that shortly after the Federal Reserve started raising interest rates, its goal was to achieve a "soft landing." The Fed uses this analogy to describe its pursuit of a relatively painless slowdown in economic growth and to avoid a severe downturn. Therefore, after raising interest rates, the Fed attempts to find a goldilocks zone of raising interest rates enough to curb inflation gradually without sending the economy too far downward into a recession.
A strong case can be made for the outlook of a soft landing. Inflation is cooling, the housing market is stabilizing with new home construction soaring, and consumer spending is resilient. Moreover, the economy added over 209,000 non-farm jobs in June, and the unemployment rate is just fractionally above its 50-year low. Will these positive signs be sustainable? We will wait and see in the coming months.
As we stated in our June newsletter:
There are more reasons to be positive about the economy now than a year ago, and higher interest rates have enabled us to better balance portfolios between stocks (equity) and bonds (debt). Perhaps economic adjustments will occur industry by industry rather than the entire economy all at once.
However, several historically reliable indicators paint a less optimistic picture. While most people focus on the CPI as a barometer for inflation, the Core Personal Consumption Expenditures (PCE) Price Index – the Fed's preferred measure of inflation – has more or less been going sideways for the last year. It stubbornly remains more than twice the Fed's 2% inflation target. This stickiness pressures the Fed to maintain elevated interest rates for longer – as we saw this month with the Fed raising interest rates by another quarter percent.
Additionally, after trillions of dollars from COVID stimulus payments were pumped into the economy, we have seen its positive effects play out in strengthening the consumer over the last few years. However, with excess savings drying up, individuals taking on more debt, and the student loan repayment pause ending in the next few months, we could see a slowdown in consumer spending. Conversely, we have also seen wage growth remain at elevated levels. The Atlanta Fed's Wage Growth Tracker shows that wages were up 5.6% compared to the previous year – just off all-time highs of 6.1% in August of last year. Given elevated inflation, this is excellent news for workers being more fairly compensated. However, this poses a challenge for the Fed as failure to control wage growth could mean consumers are more willing to spend, further pushing up prices and inflation.
With both a soft or hard landing still in the cards, there remains much uncertainty and risk in the marketplace. Our defensive mindset has helped us navigate the headwinds so far. Furthermore, investing is never an all-or-nothing decision. The gradual adjustments we have made, whether they are increasing allocations to different investments or taking profits to reduce risk, have helped steer us successfully thus far. Even with these changes, our overall investment strategy has stayed the same. We continue to err on the side of caution until we see more robust evidence to support a more prolonged positive market outlook.
Monthly Changes in Indices
Year-to-Date Changes in Indices
Monthly Performance By Sector
Year-to-Date Sector Performance
Monthly Top 5 Performers
Energy rose from the fourth-best-performing sector in June to the best-performing sector in July. Its leaders included: APA Corp (+19.23%), SLB (+18.77%), Halliburton Co (+18.46%), Phillips 66 (+16.95%), and EOG Resources Inc (+16.53%).
Communication Services +5.66%
Communications Services was the second-best performing sector in July, with its leaders including: DISH Network Corp (+20.33%), Match Group Inc (+11.14%), Meta Platforms Inc (+11.02%), Alphabet Inc Class A (+10.88%), and Charter Communications Inc (+10.29%).
Financials performed well in July, rising from the fifth-best-performing sector in June. Its leaders included: Zions Bancorp NA (+42.41%), KeyCorp (+33.23%), Comerica Inc (+27.38%), Citizens Financial Group Inc (+23.70%), and U.S. Bancorp (+20.10%).
Materials was the fourth-best performing sector in July, with its leaders including: CF Industries Holdings Inc (+18.24%), The Mosaic Co (+16.46%), Packaging Corp of America (+16.03%), WestRock Co (+14.52%), and Sealed Air Corp (+14.05%).
Industrials fell from the second-best-performing sector in June, to the fifth-best-performing sector in July. Its leaders included: Carrier Global Corp (+19.79%), Textron Inc (+14.99%), Old Dominion Freight Line Inc (+13.45%), Union Pacific Corp (+13.39%), and Boeing Co (+13.11%).
Political Events Influencing the Economy
The Federal Reserve announced another quarter-point interest rate hike, bringing the federal funds rate to the 5.25%–5.50% range – the highest since January 2001. This marks the 11th rate increase since March 2022. The European Central Bank also followed suit and raised interest rates to a 23-year high.
The Consumer Price Index (CPI) increased 3% in June over twelve months after rising 4% over the year ending in May 2023. This was the smallest 12-month increase since March 2021. For reference, in June 2022, the 12-month increase in overall prices was 9.1%.
The U.S. gross domestic product (GDP), adjusted for inflation, grew at a 2.4% annualized rate in the second quarter of 2023. This increase primarily demonstrates healthy consumer spending and business investments.
Seasonally adjusted initial unemployment claims was 221,000 at the end of July, below the 4-week moving average of 233,750. At a state level, the unemployment rate for June in half of the 50 states was at or near record lows. The states with the lowest unemployment rates were South Dakota and New Hampshire, both tied at 1.8%.
The average interest rate for a 30-year mortgage reached nearly 7% in July, its highest level of 2023 and nearing the high of 7.08% in November 2022.
The Supreme Court struck down the student loan forgiveness plan from the Biden administration, which would have forgiven up to $20,000 in student debt per person and would have impacted an estimated 43 million borrowers. After this ruling, the Department of Education announced a different initiative to cancel $39 billion in federal student loans for more than 804,000 borrowers. The administration hopes to accomplish this by accounting for more payments previously unrecognized by loan services for individuals enrolled in income-driven repayment plans toward the forgiveness available to them after 20 or 25 years.
Data from the New York Fed shows that the application rate for any kind of credit has declined to its lowest level since October 2020. In addition, more individuals are getting turned down for loans, with the overall rejection rate at 21.8% – its highest level since 2018.
“Barbenheimer” (Barbie + Oppenheimer) swept the nation in July as both movies shattered expectations at the box office.
Greta Gerwig’s Barbie pulled in $155 million, marking the best opening of 2023 and the best domestic opening for a female director in history.
Christopher Nolan’s Oppenheimer grossed $80.5 million, far outpacing its projections of $50 million.
In other Hollywood news, writers and actors are simultaneously on strike for the first time in six decades. This comes after the actors union failed to reach a new labor agreement with the Alliance of Motion Picture and Television Producers (AMPTP). The strikes reflect frustrations over compensation and the use of artificial intelligence and will halt all unionized production of movies and television shows.
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Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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