August 5, 2023 Market Update

Jim Picerno here – the director of analytics for The Milwaukee Company.  I’m filling in for Andy Willms, who’s taking a much-deserved summer break this week.

Fitch Ratings downgraded the U.S. government’s credit from the highest AAA rating to AA+, warning about the growing debt burden and political dysfunction in Washington.  Complicating matters further, the yield on the 10-year Treasury Note on Thursday hit its highest level since November 2022 before pulling back on Friday.  Meanwhile, the Treasury Department announced that it raised its borrowing estimate for the third quarter by nearly $274 billion to just over $1 trillion.

The fiscal headwinds helped send stocks lower for the week.  The S&P 500 Index fell -2.3%, its first weekly setback in a month.  The tech-heavy Nasdaq Composite Index also retreated, easing -2.9%. 

Although stocks fell, it’s not yet obvious that the selling is a sign of anything more than a normal round of consolidation.  The S&P 500 is up sharply from its October low, and has been on an especially hot run since May.  A pullback was probably coming no matter the headlines.  For now, a decline in equities is healthy in that it may lay the groundwork for more gains later in the year.

One reason for optimism: the U.S. economy still looks resilient, but not too resilient to worry the central bank.  Payrolls rose less than forecast in July, the Labor Department reports.  The 187,000 increase in jobs last month appears to be strong enough to support the view that a recession isn’t on the near-term horizon while soft enough to perhaps convince the Federal Reserve that the labor market is no threat to the recent slide in inflation. 

ZipRecruiter Chief Economist Julia Pollak says the latest jobs data is a “Goldilocks” report – not too hot, not too cold.  It shows a "graceful descent in the labor market to a sustainable cruising altitude."

No wonder, then, that traders are still expecting that the Fed’s interest rate hikes ended with last month’s increase.  Fed funds futures are pricing in high odds that the central bank will leave its target rate unchanged at its next meeting on September 20.  Let’s see if next week’s consumer inflation report for July offers a reason to think otherwise. 

That’s all for now.  Enjoy the weekend and, to quote Andy, invest wisely.