Market Update - August 2023

Market Update - August 2023

August 31, 2023

OVERVIEW

Although several headline-grabbing events shook markets in the first half of the year, many of those risks have faded. For August, the headline story was slower growth throughout the month. Although expectations for slower growth increased and are expected in the future, it is important to note that slower growth is still growth. Further, it may benefit markets and the economy over the long run because slower growth should support the Federal Reserve's (Fed's) efforts to combat inflation.


BREAKING IT DOWN

The Federal Reserve
Further rate hikes from the Fed declined during August. The Fed is expected to remain data-dependent at future meetings, so a potential slowdown in growth would support a pause in hikes for the rest of the year. Yields largely fell after Fed Chair Jerome Powell reinforced the central bank's commitment to data dependence near the end of the month.

Markets Pulled Back
Equity markets fell in August as investors pulled back from riskier investments. The S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite all dropped. Despite these modest declines, all three remained in positive territory for the quarter and year-to-date, finishing August well above their 200-day moving averages (a widely followed technical signal; prolonged breaks above or below this level can be a proxy for shifting investor sentiment) for the eighth consecutive month - a positive sign that investors remain bullish on long-term prospects for the U.S.

Market fundamentals continued to show slowing earnings growth. Although the blending earnings declined less than anticipated at the start of the earnings season, it was the largest quarterly earnings decline since the third quarter of 2020. Over the long run, fundamentals drive long-term performance, so weakening fundamentals are worth watching in the quarters ahead.

International markets also saw losses. The MSCI EAFE Index and the MSCI Emerging Markets Index fell, bringing them below their respective 200-day moving averages by mid-month. And while the MSCI Emerging Markets Index ended August below its 200-day moving average, the MSCI EAFE Index finished above trend thanks to a late-month rally.

Fixed Income Had a Mixed Month
Although results were negative across the board for equities, fixed-income returns were mixed. Rising rates continued to weigh on investment-grade bonds and the Bloomberg U.S. Aggregate Bond Index during August. High-yield fixed income, on the other hand, had a positive month. The Bloomberg U.S. Corporate High Yield Index gained as falling credit spreads supported high-yield bond returns.

Signs of Slowing Economic Growth Ahead
Economic growth may start to slow in the second half of the year. Consumer and business confidence pulled back as rising concerns about the economy's health weighed on consumers and business owners. Service sector confidence fell in July and remains below highs from earlier in the year. Falling business confidence can lead to slower spending growth and hiring, so this will be an important area to monitor. However, actual spending figures showed solid levels of personal and business spending in July, with personal spending and core durable goods orders growing more than expected.

Job growth also increased modestly, partly due to a significant negative revision to July's employment report. In addition, the unemployment rate increased more than expected, the highest since February 2022.

Risk assets rallied toward month-end as expectations for further rate hikes from the Fed declined. We ended the month with futures markets pricing in no additional rate hikes for the rest of the year.

Shifting Market Risks
Domestically, inflation remains the most significant risk because a spike in prices could lead to further rate hikes. Although this is not expected, given the outlook for slowing growth, inflation will likely continue to be a primary risk for investors throughout the year. Weakening equity fundamentals are also a potential area of concern.

Internationally, there are risks to take into consideration. The war between Russia and Ukraine could flare up and cause further market uncertainty. In addition, there are concerns about the health of the Chinese economy; signs of slowing growth in the country could signal slower global growth ahead. The immediate market impact from these risk factors remains muted, but they will continue to be areas of potential concern.

As always, there are unknown risks that have the potential to impact markets negatively.

The Long-Term Outlook Remains Positive
Despite the market pullback, the most likely path forward is continued economic growth and market appreciation for the rest of the year. Although expectations for slower growth increased, slower growth is still growth, and slowing growth may be a net positive over the long run if it helps tamp down inflationary pressure throughout the economy.

Though continued economic growth and market appreciation are likely, the potential for short-term disruptions remains due to the genuine risks markets face. As always, a well-diversified portfolio that matches investor timelines and goals remains the best path for most.

Please do not hesitate to contact our office if you have questions or want to check in. We are happy to walk you through our approach and explain what we are doing to keep you on track to meet your financial goals and needs. We look forward to hearing from you and hope you have a wonderful week.

"Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that"

 

Sincerely,

Charles D. Dodds, Jr., CFP®, CLU®, ChFC®, CIMA®
President, Sr. Portfolio Manager

Adrian F. Dodds, CFP®
Managing Partner, Sr. Financial Advisor