EQUITIES RETREAT AS U.S. GOVERNMENT CREDIT RATING DOWNGRADED DURING A BIG EARNINGS WEEK THAT SHOWED MIXED RESULTS

Weekly Market Update — August 4, 2023

• The four major U.S. equity indices retreated this week, as Fitch downgraded U.S. Government’s credit rating to AA+ from AAA on Tuesday
• The tech-heavy NASDAQ lost the most, giving back 2.8%, whereas the S&P 500 (-2.3%), small-cap Russell 2000 (-1.3%) and DJIA (-1.1%) also gave back a lot of recent gains
• It was a big week of earnings, with giants Apple and Amazon stealing the spotlight for opposite reasons, as Amazon jumped over 8% and Apple fell almost 5% after earnings were released
• Weekly initial jobless claims increased slightly
• The ISM Non-Manufacturing Index showed that services sector growth contracted again last month, its 9th consecutive month of being in contraction territory
• The 10-year Treasury yield moved up 9 basis points to come to rest at 4.06% and the 30-year Treasury yield jumped 18 basis points to 4.21%
• Of the 11 S&P 500 sectors, only Energy advanced with a gain of 1.2%, spurred on by a jump in oil prices
• The Utilities (-4.7%) and Information Technology (-4.1%) sectors were both hammered
• WTC Crude jumped 2.5% to end the week at $82.62

*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 Decline as U.S. Government Credit Rating Downgraded 

The major U.S. equity markets kicked off the month of August on a weak note, after closing out a very strong July. There was a lot of economic data and earnings reports to digest, but most of the negative sentiment swirled around rising Treasury yields and a surprising downgrade to the U.S. government’s credit rating.

The tech-laden NASDAQ was hit the worst, despite a mini rally early Friday morning when the jobs report showed that hiring is still robust and the job market is still tight.

It was a very busy week for earnings releases, but as usual, the big names – especially Apple and Amazon – garnered all of the attention. Apple reported mixed results and its stock price traded down, whereas Amazon beat expectations handily and jumped close to 8% on Friday morning.

But the big unexpected news on the week was on Tuesday when Fitch downgraded the credit rating of U.S. government debt from the highest level, AAA, to AA+. Fitch said the decision: “reflects governance and medium-term fiscal challenges.”

Economic data this week included:

• Total construction spending increased 0.5% month-over-month in June
• Total private construction was up 0.5% month-over-month while total public construction rose 0.3% month-over-month
• On a year-over-year basis, total construction spending was up 3.5%
• The July ISM Manufacturing Index rose to 46.4% in July from 46.0%, but is still showing a contraction
• Manufacturing sector labor productivity increased 3.7% in the second quarter but output up 2.4% and hours worked down 1.3%
• July unemployment rate was 3.5%
• July average hourly earnings were up 0.4% and over the last 12 months, average hourly earnings have risen 4.4%
• The average workweek in July was 34.3 hours
• The labor force participation was 62.6% for the fifth consecutive month
• Nonfarm payroll came in below 200,000 for the second straight month and the unemployment rate fell to 3.5% in July, close to a 50-year low

Earnings Surprises Abound

Research firm FactSet reported that of the 84% of S&P 500 companies that have reported results for Q2 2023 as of Friday:

• 79% have reported actual EPS above estimates
• This is above the 5-year average of 77% and above the 10-year average of 73%
• This number also marks the highest percentage of S&P 500 companies reporting a positive EPS surprise since Q3 2021 (82%)
• In aggregate, companies are reporting earnings that are 7.2% above estimates, which is below the 5-year average of 8.4% but above the 10-year average of 6.4%

Manufacturing in Contraction Territory

The July ISM Manufacturing Index rose to 46.4% in July from 46.0% in June (the dividing line between expansion and contraction is 50.0%). This is the ninth straight month of being sub-50.0% although July saw less of a contraction versus June.

Specifically:

• The New Orders Index increased to 47.3% from 45.6%.
• The Prices Index rose to 42.6% from 41.8%.
• The Backlog of Orders Index jumped to 42.8% from 38.7%.
• The Supplier Deliveries Index edged higher to 46.1% from 45.7%.
• The Production Index increased to 48.3% from 46.7%.
• The New Export Orders Index decreased to 46.2% from 47.3%
• The Employment Index dropped to 44.4% from 48.1% – – the lowest reading since July 2020.

Productivity & Labor Costs Up in 2Q

Manufacturing sector labor productivity increased 4.0% in Q2, as output increased 1.9% and hours worked decreased 2.0%. Unit labor costs in the total manufacturing sector increased 3.6%, driven by a 7.8% increase in hourly compensation and a 4.0% increase in productivity.

In addition:

• From the same quarter a year ago, nonfarm business sector labor productivity increased 1.3%, reflecting a 2.6% increase in output and a 1.2% increase in hours worked.
• That is the first increase in the four-quarter productivity measure since the fourth quarter of 2021.

Total Construction

• Construction spending during May 2023 was estimated at a seasonally adjusted annual rate of $1,925.6 billion, 0.9% above the revised April estimate of $1,909.0 billion.
• The May figure is 2.4% above the May 2022 estimate of $1,880.9 billion.
• During the first five months of this year, construction spending amounted to $740.8 billion, 2.9% above the $719.6 billion for the same period in 2022.

Private Construction

• Spending on private construction was at a seasonally adjusted annual rate of $1,513.2 billion, 1.1% above the revised April estimate of $1,497.2 billion.
• Residential construction was at a seasonally adjusted annual rate of $857.4 billion in May, 2.2% above the revised April estimate of $839.4 billion.
• Nonresidential construction was at a seasonally adjusted annual rate of $655.8 billion in May, 0.3% below the revised April estimate of $657.8 billion.

Public Construction

• In May, the estimated seasonally adjusted annual rate of public construction spending was $412.4 billion, 0.1% above the revised April estimate of $411.8 billion.
• Educational construction was at a seasonally adjusted annual rate of $87.7 billion, virtually unchanged from the revised April estimate of $87.7 billion.
• Highway construction was at a seasonally adjusted annual rate of $124.6 billion, 0.4% below the revised April estimate of $125.1 billion.

census.gov ; ismworld.org; factset.com ; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com; census.gov ;