Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of August.
GLOBAL
TRENDS
The global economy continues to experience an economic slowdown in response to the pressures spurred by the disruptions from Russia’s invasion of Ukraine, high inflation, geopolitical uncertainties domestically and abroad, recent domestic bank failures, and increasingly restrictive monetary policy from the United States and the Eurozone’s central banks. Global banking stresses, inflation in many developed nations, and growth concerns have kept investors on edge.
Geopolitical turmoil, lingering COVID-19 economic restrictions, supply chain bottlenecks, restrictive central bank policy actions, and inflation measures are topics that the Investment Management Group is monitoring.
CENTRAL BANK
POLICIES
The Federal Open Market Committee (FOMC) last met on July 26th and increased their policy rates 25 basis points leaving their target range at 5.25%-5.50%. At the July 26th press conference Fed Chair Jerome Powell stated that: “Inflation remains well above our longer-run goal of 2%” and that “… the process of getting inflation back down to 2% has a long way to go.” This past month, Fed Chair Powell spoke at the Jackson Hole Economic Symposium and reiterated this view: “Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate…” As of the end of August, market participants continue to believe we have likely hit peak interest rates with prospective cuts coming in the first half of 2024.
The European Central Bank (ECB) last met on July 27th and increased interest rates by 25 basis points. In their subsequent press release it was noted that: “The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target.” At the end of August, markets continue to expect another 25-basis point hike for 2023 from the ECB.
EQUITY
PERFORMANCE
Global equities were lower in August. Domestically, in the S&P 500, Energy was the only sector that posted positive returns with all other sectors retreating over the month. Specifically, Consumer Staples and Utilities fell the most.
Second quarter 2023 earnings season continues to wrap up, with only a couple companies in the S&P 500 yet to report their financial results as of the end of August. Overall, earnings results were through expectations in all sectors of the S&P 500; however, earnings growth continues to be negative relative to the prior earnings season.
The S&P 500 Index fell by 1.6% in August. The blue-chip Dow Jones Industrial Average fell by 2.0%. The tech heavy NASDAQ Composite fell by 2.1%. International stocks were also lower with the MSCI All Country World Index of developing and developed market stocks falling 2.8% in August. The MSCI Emerging Market Index plummeted by 6.2% in August. The MSCI EAFE Index of developed international equities fell by 3.8% in August.
INTEREST RATES
AND GROWTH
On July 27th, second quarter U.S. GDP was reported, detailing quarter-over-quarter economic expansion of 2.4%, but was revised lower on August 30th to 2.1%, above consensus estimates of 1.8%. The strong report was supported by continued strong personal consumption metrics.
In June, the Fed released its Summary of Economic Projections which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested improved projections on GDP and Unemployment for year-end 2023.
During the month of August term points in the U.S. Treasury curve moved mostly higher. At August month-end, the U.S. Treasury 2-year yield fell 1 basis point to 4.86% with the 10-year rising 15 basis points to 4.11%. The results of these changes netted a slightly less inverted curve with the 2/10 inversion contracting to 75 basis points.
Mortgage Rates moved higher in July as the Freddie Mac 30-year Primary Mortgage Market Survey rose to 7.18% on August 31st up 37 basis points from July 27th.
POLITICAL AND
REGULATORY TRENDS
On August 29th President Bident released a list of 10 drugs that have been selected for price controls starting in 2026. In a statement by President Biden, it was noted that “When implemented, prices on negotiated drugs will decrease for up to 9 million seniors.”
The Fiscal Responsibility Act, which lifted the ceiling on federal debt, was signed on June 3rd by President Biden and detailed spending caps for the next 6 years which could reduce spending by roughly $1 trillion over the next decade. When Congress returns from an August recess, pressure will mount to pass a new federal budget by the deadline date of September 30th. If Congress cannot pass roughly twelve separate spending bills, the U.S. Government will face a shutdown on October 1st, when the new fiscal year begins. However, lawmakers could pass a continuing resolution, which would avert a shutdown and fund the government at current levels until an agreed upon date.
INVESTMENT
TRENDS
The July CPI report detailed year-over-year inflation at 3.2%, above target levels and above the previous month’s 3.0%. The second quarter U.S. GDP report detailed an expanding US economy with a 2.1% growth rate, above market expectations. The GDP report specifically detailed that personal consumption trends remain strong, even in the face of economic and geopolitical headwinds.
Recent stresses on the global financial system, persistent inflation domestically and abroad, and geopolitical tensions continue to weigh on investor sentiment. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a slower than initially expected pace.
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