Investment Update August 1, 2023

Last Week on Wall Street

Economic news for the week included the U.S. Federal Reserve raising interest rates by another quarter percent, Q2 GDP growth that came in stronger than expected, as did durable goods orders and consumer sentiment.

Global equities gained for the week, with positive economic news and improved inflation readings. Bonds were generally negative, as interest rates ticked higher along with central bank hawkishness about potential future hikes. Commodities were mixed, with oil prices up 5%.

U.S. stocks ended the week mixed to higher, with a bit uncertainty in direction following the Fed’s decision to raise rates, strong U.S. GDP growth, durable goods and consumer sentiment results that defy worries about a potential recession, as well as decent corporate earnings and falling PCE inflation. The S&P 500 has risen significantly from a low point in October. However, other technical signals, such as near-term relative strength, point to a potentially overbought condition. This isn’t unusual, nor would be a short-term pullback at this point.

By sector, communications led the way, up 7%, with solid contributions from Alphabet and Meta Platforms based on earnings results, followed by gains in materials and energy. Typical defensive sectors utilities and health care lagged with negative returns. Real estate also fell by -2% along with higher interest rates. 

Foreign stocks eked out small gains on the week in developed markets, while emerging markets rose sharply. As in the U.S., the ECB raised their key interest rate by 0.25% to 3.75%, also the highest level in decades. Here, too, inflation concerns have driven policy higher, despite more concern over industrial slowing, particularly in Germany. The path in Europe between growth and recession is far narrower, with recent GDP data showing a few tenths on either side of zero. The Bank of Japan was also in the news, as they relaxed their 10-year interest rate target band, at 0.0% +/- 0.5%, referring to it more as a looser reference point than a limitation (implying they could allow long-term rates to gradually rise). This was largely due to their strict policy over the past decade to keep rates well contained, although higher inflation has added pressure to this last country to keep rates at ultra-low levels.

Emerging markets were led by Chinese stocks rising over 6%, in response to signals of further government support to bolster the economy, including the troubled real estate sector. Chile was the first emerging market to cut rates last week, by 1.00% to 10.25%, as inflation has already fallen by half to 7.6%. By itself, this normally wouldn’t be newsworthy, but Chile is part of a group of emerging market nations in Latin America and Eastern Europe which were the first to hike starting in summer 2021, but have since begun the process of potentially reversing course. Interestingly, most of these nations are not in or near full recession necessarily, aside from some labor stress, which would often coincide with rate cuts. 

Bonds declined last week broadly, as interest rates ticked higher across the yield curve. Corporate credit, particularly high yield, fared better than governments; floating rate bank loans ended in the positive. Developed market foreign bonds were held back by a stronger U.S. dollar, while emerging market debt prices rose along with pro-risk sentiment. 

Commodities were led by gains in energy and industrial metals, offsetting weaker prices for agriculture and precious metals. Crude oil rose over 4% last week to $81/barrel, along with a falling rig count and hopes for Chinese stimulus. This offset a drop in natural gas prices.