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August 12, 2023 Market Update

Jim Picerno here – director of analytics for The Milwaukee Company.  I’m pinch-hitting for Andy Willms with today’s summary of markets activity.

The U.S. stock market extended its decline for a second week, but the slide slowed to a crawl.  Although investors are still inclined to sell lately, the retreat has been moderate so far, the S&P 500 Index eased just 0.3% by Friday’s close.  Technology shares took a bigger hit, which is a reason why the tech-laden Nasdaq Composite Index lost 1.9% for the week.

Notwithstanding last week’s decline, the S&P is still up a strong 16.3% year to date while the Nasdaq has surged more than 30% so far in 2023 even after pulling back from its recent high.

Small-cap stocks, by contrast, continue to struggle this year.  After a strong start to 2023, the so-called small-stock premium has faded.  The Russell 2000 Index, a widely followed benchmark that tracks smaller firms, is up a bit more than 9% this year.  That’s a respectable gain on its face, but in relative terms it’s disappointing for investors who expect more from a corner of the market that academic studies identify as a source of higher return, at least for the long run.

Thursday’s weekly update of initial jobless claims – a leading indicator for hiring – reported a jump in new filings for unemployment benefits to a five-week high.  But when you consider that the overall number of claims is still close to a multi-decade low, it’s fair to say that there’s still no clear sign of trouble brewing in this key economic indicator.

Ditto for the latest numbers on inflation.  The Consumer Price Index (CPI) rose a mild 0.2% in July, the Labor Department said.  Core inflation, which strips out energy and food prices to minimize noise, also rose 0.2%.  CPI’s one-year change ticked up to 3.2%, but the core trend held steady at 4.7%. 

Some economists point to the three-month annualized rate of core inflation for a clearer sign of the inflation trend in recent months.  Using this yardstick, the July update shows that inflation is fading at a faster pace as the three-month change dropped to 3.1%, the lowest in two years.  Laurence Meyer, a former Fed governor, says “There’s absolutely no question that core inflation has turned the corner faster” than the Fed anticipated.

That’s a factor for why the market continues to assume the Fed will forgo rate hikes from here on out.  Fed funds futures on Friday priced in a near-90% probability that the central bank will leave its target rate unchanged at the next policy meeting on September 20.

That’s all for now.  Enjoy your weekend.