Weekly Market Update: August 28, 2023
The Federal Reserve has maintained its hawkish monetary policy stance. This was evident in the release of the minutes from the July Federal Open Market Committee (FOMC) meeting. The central bank noted upside risks of inflation that could require additional monetary tightening. Fed leaders also said that disinflation in core prices, which exclude the more volatile food and energy components, was still not significant enough for the lead bank to think its job of promoting stable prices is complete.The minutes indicated that more below-trend growth is needed to bring supply and demand into better balance and ultimately push prices lower. The second-quarter gross domestic product (GDP) advance reading of 2.4% and the recent gains in retail sales and industrial production suggest this objective remains elusive.
The recent struggles of fixed-income securities have given the market some indigestion. Treasury market yields have spiked in recent weeks, as reflected by the yield on the benchmark 10-year Treasury note hitting its highest level since 2007. This development is putting pressure on stocks, particularly those of the higher-growth, but often less profitable, companies. The elevated yields are the product of a number of factors, including the solid June-quarter GDP figure, the massive selling of Treasury notes by the Fed following the temporary resolution of the debt ceiling, and the downgrade of U.S. issued debt by a major credit ratings agency on August 1st.
Americans are still spending. Consumption activity has been the backbone of GDP expansion, but should the recent trend be worrisome? True, the tight labor market has given consumers more confidence, but the recent spending has come at the expense of shrinking savings accounts and sharp increases in credit card transactions. Higher prices due to inflation are forcing many families to turn to the credit market to make ends meet. Credit card balances topped the $1 trillion mark in the second quarter. These bills will eventually come due, with substantial interest, and when combined with the resumption of student loan repayments in October, may hurt future spending.
Conclusion: The market is faced with a lot of uncertainty at a time of the year that has historically not been a great period for equities. Given this environment, we recommend maintaining a well-diversified portfolio.