Published August 18, 2023
Stocks rise on a ‘wall of worry’. As the worries turn out not to be true, buying accelerates. The market’s euphoric rally in June signaled that investors collectively had overcome virtually all the worries of recession and interest rates leading to the bear market. In true bull market fashion, investors have rotated from the initial leaders to other sectors of the market, lifting all boats as it were. Eventually, a new worry surfaces sending prices back down a bit in a market correction. We are there now.
1) A report out of China last week was the shot across the bow of this market rally. The second largest economy in the world was faltering with exports falling and the specter of DEFLATION rearing its head. Deflation is the most feared word in markets – a self-reinforcing death spiral of falling prices as consumers horde cash and investment stagnates.
There’s worry #1 – China’s economy is not recovering thus reducing growth prospects globally, especially in Europe.
China skids, taking Asia down with it.
2) The market narrative has been that the Fed was done raising interest rates, thus leaving room for rates to begin falling back sometime in the next year. But stronger domestic economic reports and stubborn inflation in some areas has led investors to question that notion and begin embracing a “higher for longer” thesis. Ten- and thirty-year bond yields have surged higher on the new narrative, punishing growth stocks which were already ripe for a pullback.
There’s worry #2 – interest rates will be higher for longer.
Long-term bond yields surge
3) Finally, August and September are the worst months of the year for stocks, seasonally. Simply the awareness of this pattern makes investors quick on the selling trigger. As the above fundamental issues have cropped up, investors have been quick to run into now-richer bonds and cash.
August and September swoon in stocks
Ok. Our wall of worry has been rebuilt and prices are correcting. Markets will now take a negative view of news items that only a month or two before were viewed positively. Until … a surprise will come along to force investors to wonder if prices have dropped enough. There will be some initial buying. If bulls can string together a few solid days, shorts will have to cover their positions by buying, sending prices sharply upward. And a new rally can begin.
After a couple of down weeks, the Nasdaq opened this week with a solid +1% gain as investor favorite Nvidia paced a rebound despite a tick upward in interest rates. The gain was reversed Tuesday as a strong retail report pushed investors to think harder about interest rates holding higher for longer. Also concerning was another of a string of reports out of China showing the government there reducing rates to try to bolster the economy. Further interest rate moves came Wednesday to push stocks down another -0.8%. The Atlanta Fed’s GDPNow report projects GDP growth of a rapid +5.8% in the third quarter, hardly the “soft” economic data that would lead the Fed to reduce rates anytime soon. At the same time, retailers Target and Walmart both came out with earnings affirming the strength of consumers. A strong labor report was the impetus for rates to continue their climb Thursday. Mortgage rates hit a 20-year high crossing 7%. Stocks slipped further with a -0.8% drop Thursday. Friday brought a positive reversal with stocks opening lower only to claw their way back to breakeven in Friday’s session. Ross Stores became another retailer posting strong results with their report Friday. Oil prices popped higher defying the angst over a weakening Chinese economy.
Stocks made it a third straight week of selling with the S&P 500 falling -2.05%. The Nasdaq 100 (QQQ) tumbled -2.21%. Smallcap stocks complete a roundtrip giving back all of their summer advance with this week’s -3.32% fall.
Warm wishes and until next month.