Tucker Financial Weekly Market Review: August 4th, 2023

Markets kicked off the new month by taking in a large number of Q2 earnings reports and a healthy calendar of economic reports in a challenging week for risk assets. The S&P 500 broke a three-week win streak by posting its worst week since the March banking sector turmoil, falling 2.27% while most other major indices joined the S&P in the red including the Nasdaq (-2.85%), Russell 2000 (-1.22%), international developed (- 3.06%), and emerging (-3.3%) markets. Bond yields declined through 5yr maturities but increased beyond that adding to a string of volatile weeks in the bond markets. WTI oil increased 2.7% but most other commodities declined on the week while the USD enjoyed a risk off bid, increasing 0.39% on the week.

• Equity markets have experienced some consolidation to begin August on the back of two strong months due to a combination of rising yields, policy uncertainty, and an overbought/overvalued market conditions reminding us the S&P 500’s reliance on mega caps cannot extend indefinitely.

• Bond yields fell on shorter maturities and rose across longer maturities, ending with yields of over 4% across the entire yield curve. Large Q3 Treasury issuance, labor market dynamics, and perhaps a marginal nod to the Fitch downgrade contributed to these moves.

• Whether or not we’re out of the woods of inflation could be a significant determinant for financial markets over the next 12-24 months with unexpectedly renewed inflation pressures a primary risk to risk asset returns.

• The bullish narrative of peak Fed funds rate/soft landing from here stands opposed to the bearish narrative of higher for longer and lagged effects of the very aggressive tightening cycle yet to work its way fully into the economy.

• BCA Research notes while valuations have little predictive value over the short term, they are a significant determinant to longer term (strategic) investing outcomes as evidenced by a simple regression on P/E multiples and subsequent returns on the S&P 500.

• Bianco Research noted the SLOOS cyclical and balance sheet pressure on small and mid-sized banks is translating as expected to tightening lending standards, posing a headwind to economic growth looking forward.

• Fitch Ratings’ downgrade of U.S. debt from AAA to AA+ grabbed headlines (and podiums) but did not translate to any meaningful market impact. Analysis by JPM and the ratings agencies suggests a one notch downgrade by all three agencies narrows yields by approximately 8bps.

• Chile became the first major emerging market central bank to cut rates (-100bps) and signaled more rate cuts are likely to follow.

• July payrolls increased by a less than expected 187,000 (200,000 expected) and the unemployment rate fell from 3.6% to 3.5%. Average Hourly Earnings growth remained at 4.4% (0.4% MoM), against consensus calling for a decline.

• June’s JOLT Survey revealed 9.582M job openings, slightly under consensus forecast of 9.650M but within the forecast range.

• July’s ISM Manufacturing Index registered 46.4, in line with the spot consensus forecast of 46.5.

• Eurozone 2Q GDP registered 0.3% q/q, returning to positive growth following a 0% Q1 and -0.1% Q2. Headline inflation eased from 5.5% to 5.3%.