EQUITIES MIXED AS INFLATION INCHES UP AND RISING TREASURY YIELDS DAMPEN THE TECH AND SMALLER-CAP NAMES

Weekly Market Update — August 12, 2023

• It was a mixed week for the four major U.S. stock indices, with the mega-cap, 30-stock DJIA scratching out a small +0.6% return whereas the other three gave back some recent positive gains
• NASDAQ (-1.9%) was hit the hardest and declined for the second week in a row, the first time that has happened in many months, while the smaller-cap Russell 2000 (-1.7%) and the larger-cap S&P 500 (-0.3%) also lost ground
• The catalysts for the week was clearly inflation, as the Consumer Price Index and the Producer Price Index registered modest increases, raising worries that the Fed might need to raise rates another time before the year is over
• Somewhat less-noticed by the media, but certainly noticed by Wall Street was that 10 smallish banks were downgraded by Moody’s and a number of larger banks were put on notice
• Of the S&P 500 sectors, Energy (+3.5%) and Health Care (+2.5%) outperformed significantly whereas Information Technology (-2.9%) brought up the rear
• Treasury yields rose this week, as the 2-year Treasury yield moved up 11 basis points to 4.89% and the 10-year rose nine basis points to 4.17%
• WTI Crude rose slightly on the week and came to rest just north of $83/barrel

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Stocks & Equities Mixed as Inflation Ticks Up

It was a mixed week for the major U.S. equity indices, as the DJIA squeaked out a modest gain and NASDAQ and the Russell 2000 lost close to 2% as inflation and U.S. Treasuries both rose. The good news was that trading volume was very light, as is typical for August.

Value stocks significantly outperformed Growth stocks and the interest-sensitive indices – namely NASDAQ and the Russell 2000 – struggled as the 10-year Treasury settled-in well north of 4%.

The Healthcare sector made a big jump on the week, but Information Tech really struggled, mostly on the belief that rising rates will really impact future profits. In addition, Financials struggled early in the week after Moody’s lowered its credit ratings for 10 smaller banks and placed six other banks on downgrade watch.

The big news of the week was the release of a couple of key inflation data sets, including the Consumer Price Index for the month of July, which showed headline CPI at 3.2% year-over-year. Further, core inflation, excluding food and energy, came in at 4.7%. But the Producer Price Index came in a little hotter than expected, possibly causing investors to take money off the table and worry that the Fed might indeed raise rates yet again this year.

While we are only 11 days into August, equities have been retreating mostly, with the S&P 500 down about 3% since its recent high on July 31st and NASDAQ down about 4% since then.

Inflation Inches Up

On Thursday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers rose 0.2% in July on a seasonally adjusted basis, the same increase as in June. In addition, over the last 12 months, the all items index increased 3.2% before seasonal adjustment.

• The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90% of the increase, with the index for motor vehicle insurance also contributing.
• The food index increased 0.2 percent in July after increasing 0.1% the previous month.
• The index for food at home increased 0.3% over the month while the index for food away from home rose 0.2% in July.
• The energy index rose 0.1 percent in July as the major energy component indexes were mixed.

On a yearly basis:

• The all items index increased 3.2% for the 12 months ending July, slightly more than the 3.0% increase for the 12 months ending in June.
• The all items less food and energy index rose 4.7% over the last 12 months.
• The energy index decreased 12.5% for the 12 months ending July.
• The food index increased 4.9% over the last year.

Producer Price Index Up Too

On Friday, the U.S. Bureau of Labor Statistics then reported that the Producer Price Index for final demand increased 0.3% in July, seasonally adjusted. Final demand prices were unchanged in June and declined 0.3% in May. On an unadjusted basis, the index for final demand advanced 0.8% for the 12 months ended in July.

Further:

• In July, the increase in final demand prices was led by a 0.5% rise in the index for final demand services.
• Prices for final demand goods edged up 0.1%.
• The index for final demand less foods, energy, and trade services moved up 0.2% in July, the largest increase since a 0.3% rise in February.
• For the 12 months ended in July, prices for final demand less foods, energy, and trade services advanced 2.7%

Small Businesses Feeling Slightly More Optimistic Since Last Month

On Tuesday, the NFIB’s Small Business Optimism Index increased 1.6 points in June to 91.0, however, it is the 18th consecutive month below the 49-year average of 98.

• Inflation and labor quality are tied as the top small business concerns with 24% of owners reporting each as their single most important problem.
• The net percent of owners raising average selling prices decreased three points to a net 29% seasonally adjusted, still a very inflationary level but trending down.
• This is the lowest reading since March 2021.

Additional findings included that:

• Small business owners expecting better business conditions over the next six months improved 10 points from May to a net negative 40%, 21 percentage points better than last June’s reading of a net negative 61%.
• Forty-two percent of owners reported job openings that were hard to fill, down two points from May but remaining historically very high.
• The net percent of owners who expect real sales to be higher improved seven points from May to a net negative 14%.

Small Businesses Struggling to Hire

As reported in the NFIB’s monthly jobs report, 59% of owners reported hiring or trying to hire in June, down four points from May. Of those hiring or trying to hire, 92% reported few or no qualified applicants for the positions they were trying to fill.

Small Businesses Spending Less Money

In addition, 53% of owners reported capital outlays in the last six months, down four points from May. Of those making expenditures:

• 37% reported spending on new equipment;
• 21% acquired vehicles;
• 14% improved or expanded facilities;
• 8% spent money on new fixtures and furniture; and
• 6% acquired new buildings or land for expansion.

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