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August 19, 2023 Market Update

The U.S. stock market retreated for a third week through Friday’s close.  The S&P 500 Index fell 2.1%, ending the week at its lowest level since late June.  Stocks are still up by a strong 13.8% so far this year, but market sentiment has become increasingly cautious in recent weeks as investors focus on various concerns that have moved to the fore lately.

The latest decline in equities was fueled, in part, by a new run of rising U.S. Treasury yields.  The benchmark 10-year Note closed the week at 4.26%, close to a 15-year high.

Renewed worries about China’s economy are also providing an excuse for investors to turn more defensive lately.  As growth forecasts are revised down, there are new signs of financial stress in the country’s real estate sector and, most recently, a large asset manager.  The market is concerned that spillover effects may be brewing for the global economy.

Meanwhile, several nowcasts of the U.S. economy posted sharply higher numbers this past week.  The Atlanta Fed’s widely followed GDPNow model, for example, published a sizzling 5.8% growth estimate for gross domestic product (GDP) in the third-quarter.  If correct, output is set to accelerate at a pace that’s more than twice as strong as Q2’s 2.4% increase.

The possibility of a hotter economy has investors rethinking the potential for more interest rate hikes by the Federal Reserve.  Supporting that concern: minutes from the latest Federal Reserve meeting, released on Wednesday: “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

Longer-term yields got an additional boost last week when the Treasury Department announced that it would need to borrow more than anticipated in the coming months to finance the federal budget deficit.  The 30-year Note’s yield ended the week at 4.38%, the highest since October.

The rise in ultra-safe Treasury yields could prove to be a problem for the stock market in the near term because higher bond yields can encourage investors to rotate funds from equities to fixed-income securities.  And, with equities having retraced a large share of 2022 losses while earnings growth has slowed, stocks have become increasingly expensive and perhaps more vulnerable to the downside as a result.

That’s all for now.  Have a great weekend, and invest wisely my friends.