Investment Update September 6, 2023

Last Week on Wall Street

Economic data for the week included a revision downward for U.S. Q2 GDP, as well as improved but still negative ISM manufacturing. Housing results were generally positive, from the standpoint of home prices and pending sales. Labor market data was mixed, with continued signs of slowing, but remaining decent.

Global equities experienced gains, with U.S. stocks outperforming most foreign with benign economic, inflation, and interest rate news. Bonds rose along with a pullback in interest rates. Commodities were led higher by crude oil and industrial metals.

U.S. stocks started off well last week, particularly Tuesday as job openings declined significantly (presumably lowering the probability of another Fed rate hike). The downward revision of Q2 GDP on Wednesday also pointed to lowered likelihood of a hike. Later in the week, the employment situation report reaction was mixed, with signs of labor slowing a positive in terms of keeping Fed policy where it is, but the sharply higher unemployment rate again raised some recession concerns.

By sector, cyclicals broadly gained, led by technology, materials, energy, and consumer discretionary, each with returns of 3-4% on the week. Defensive industries utilities and consumer staples lagged with declines. Real estate also rose over a percent for the week.

Foreign stocks performed positively, albeit to a lesser degree than in the U.S., with the exception of Japan, which outperformed all markets. In emerging markets, results were widely mixed by country, with Chinese stocks rising upon additional stimulus measures being announced, including lower foreign currency reserve requirements, and reduced down payments and rates for home buyers. The infamous homebuilding firm Country Garden, China’s largest property developer, is on the brink of default, after missing several bond payments and is apparently considering a restructuring. This again highlights still-present risks in that nation’s real estate sector—which directly accounts for at least a quarter of GDP.

Bonds fared positively last week, along with a decline in interest rates—no doubt helped by the mixed economic and inflation data that added to assumptions the Fed could keep further rate hikes on hold. High yield and floating rate bank loans outperformed investment-grade debt, with a current yield advantage. Based on the New York Fed’s Corporate Bond Market Distress Index, which goes back to 2005, the bond market continues to show ‘easy’ conditions, with little sign of stress—in both investment-grade and high yield. Foreign bonds were mixed, with a stronger U.S. dollar helping U.S.-denominated emerging market debt outperform local bonds.  

Commodities gained across the board, led by energy and industrial metals, and precious metals also up a percent. Crude oil prices increased a sharp 7% last week to over $85/barrel, with growing expectations that OPEC+ nations will keep production cuts in place until the end of the year at least. Energy price rises were muted likely in response to less destruction than expected by the recent hurricane, as well as the location. Historically, storm landfall near production or storage facilities has tended to add more stress to pricing this time of year.