Weekly Market Update: August 14, 2023
The nation added 187,000 nonfarm payroll positions in July. That figure came in short of the consensus expectation of 200,000 and was accompanied by respective downward revisions of 25,000 and 24,000 to the May and June job estimates. The unemployment rate was unchanged at 3.5%.
The Labor Department report was a mixed bag for the Federal Reserve in its battle to tame inflation. The 11 interest-rate hikes implemented since March, 2022 are having an impact on growth and job creation. However, the average hourly wage continues to rise, climbing 0.4% last month, which was a bit stronger than anticipated. On a 12-month basis, the average hourly wage jumped 4.4%, matching the June pace and still running at a rate hotter than the central bank would like at this stage of the monetary policy tightening cycle.
Second-quarter earnings season was better than feared. With nearly 85% of the S&P 500 companies having reported as of press time, 80% delivered a positive earnings-per-share surprise. Still, blended earnings for those S&P 500 companies were down roughly 5%, which would represent the biggest decline since the third quarter of 2020. The current price-to-earnings multiple for the S&P 500 Index is above 19, higher than both the 10 and five-year averages and indicative of an overbought market. This frothy valuation leaves stocks susceptible to selling on disappointing news. On point ...
A recent downgrade of U.S. debt by a major credit rating agency roiled the financial markets. The agency cited concerns about Congress’ ability to approve a new fiscal budget by the looming fall deadline and the ballooning national debt levels. This, along with some renewed concerns about the regional banks, bears watching, especially if inflation remains sticky and the Fed is forced to stay increasingly restrictive on the monetary policy front. The consensus among economists is that rate cuts will not occur until late 2024, if at all next year.
Conclusion: As seen by the negative reaction to the credit ratings downgrade of U.S. debt, the market at its elevated valuation is susceptible to selling on dour news. Given this backdrop, a balanced investment approach, consisting of a well-diversified portfolio of high-quality names seems warranted.