Weekly Update

Summer Doldrums for the Market

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Published August 25, 2023


As summer winds down, we have seen August play out in its usual way so far – weak. Here with more comment on recent market moves is Delta Research:

“In the past three months, the 10-year US treasury rate climbed by more than 15%. The sharp move higher during the month of August took the 10-year rate to the highest level its been since November 2007. As treasuries moved higher in August, stocks traded lower. The S&P 500 declined from August 1 to the Friday low of last week by 5.5% and the NASDAQ 100 was down 6.7%.
10 year treasury vs. S&P 500

What caused the 10-year treasury rate to accelerate higher in August was lots of good news about the U.S. economy. Inflation is falling, earnings estimates are rising, retail sales are ahead of expectations and the job market remains firm. Since August 1, the Atlanta Fed GDPNow forecast for third quarter GDP growth has risen from about 3.9% to 5.8%.

At some point when interest rates go too high, stock valuations and eventually economic activity pull back. It appears that we approached this tipping point in August.

What is providing some rate relief this week is the global economy is slowing down. Preliminary manufacturing index readings out of the eurozone (Germany, France, Italy) were below expectations and in the sub-50% contraction zone. Export data from China has been weak and the People’s Bank of China (PBOC) lowered its one-year prime rate again this week in an effort to address falling real estate prices and weak consumer spending. Weakness abroad raises expectations that the Fed is done with rate hikes and may begin to talk about lower rates.

Short-Squeeze Over

Coming into 2023, hedge funds and investment banks expected recession and lower corporate earnings. After the first quarter earnings reports were released in April, it became evident that both the economy and corporate earnings were in much better shape than expected.

When hedge funds expect lower prices in the future, they often sell stocks short. As prices remained firm and began to rise in April, short-sellers rushed to buy back their short positions to prevent further loss. A basket of stocks with the most concentrated short interest rallied by nearly 40% between May and July as the “short-squeeze” played out. With the shorts covered and the intense buying pressure relieved by the end of July, that same index pulled back by 18% in August.

Hedge fund positioning is much more neutral today. Their heavy-handed trading during the slow summer months appears to have played out. With interest rates backing off 16-year highs and hedge funds moving into a wait-and-see mode, the S&P 500 has been able to stabilize this week.”


Market Update

Three consecutive weeks of selling pressure in stocks. Would AI darling, Nvidia, be able to arrest the August swoon? That question, plus the speech by Fed Chair Powell from the Fed’s Jackson Hole, Wyoming retreat, would drive the week’s market tone. Monday saw Nvidia shares rally ahead of the Wednesday earnings announcement lifting tech stocks by +1.6% despite a rise in interest rates. Stocks slipped back -0.3% Tuesday as a group of retailers issued weak reports. Wednesday brought another tech rally with retailers offering a wide range of reports, some very good, others not. The broad market lifted +1.1%. But again, the move higher was a one-day wonder. Nvidia’s earnings were very strong. But the market sold the news. A strong open to the day’s trade gave way to selling, leaving the stock market down -1.3% with the Nasdaq almost off -2%. Friday brought Powell’s Jackson Hole remarks. The remarks ended up being positive for stocks as Powell suggested that the Fed is largely in wait-and-see mode. After falling into the red during the morning, stocks pushed higher to close with solid +0.7% gains.

A seesaw week left stocks mixed. The S&P 500 rose +0.79% for the week while the Nasdaq 100 (QQQ) gained +1.64%. Smallcap stocks dipped -0.35%.

Warm wishes and until next week.