Market Commentary

August chipped away at July’s gains despite the end of month rally. Small-cap stocks performed the worst. Most of the month witnessed a sell on the news mentality and profit taking. Money Market funds hit an all-time high of $5.58 trillion as $14.37 billion rotated in as U.S. Treasury yields retreated. 79% of S&P 500 companies beat earnings per share estimates.

The Consumer Discretionary sector reported the highest earnings growth out of all 11 sectors in the S&P 500 at 54%. Energy was the best performing sector for the month, while Utilities was hard hit. Overall S&P 500 earnings retreated -4.1% for a third straight year over year decline.
 
S&P 500:                  Aug -1.77%              YTD +17.40%
DOW:                          Aug -2.36%             YTD +4.75%
NASDAQ:                Aug -1.96%              YTD +34.09%
Russell 2000:      Aug -5.17%              YTD +7.86%
 
Sector Performance YTD:

Communication Services +43.4%
Consumer Discretionary +33.0%
Consumer Staples -2.8%
Energy +2.8%
Financials +1.0%
Healthcare -2.1%
Industrials +10.4%
Materials +7.5%
Real Estate -0.2%
Technology +44.0%
Utilities -11.8%
 
U.S. Treasury Yields:

6 Month Bill              5.47%
2 Year Note              5.00%
5 Year Note              4.37%
10 Year Note            4.27%
30 Year Note            4.37%
 
The Economy and the Fed:

187,000 jobs were added in August and both June and July job numbers were revised modestly lower. The unemployment rate came in at 3.8% and the data suggests that the strong labor market is slowing down. GDP (Gross Domestic Product) increased 2.1% in Q2 and the latest estimate for Q3 is 5.9%. August’s ISM Manufacturing Survey printed at 47.9, higher than the expected 47.0 and strongest since February this year. The sector remains in contraction but is showing better inventory controls and a pickup in production.

The housing market continues to be tight despite an uptick in construction. With 30-year mortgage rates at roughly 7.53% and limited supply, this should remain constant.

Fed Chair Powell spoke at Jackson Hole and continues to be data dependent. Powell is sticking to the 2% inflation target and the higher for longer stance. The market believes that Powell will not raise the lending rate in September (20^th) and may only raise once more for the year in November.

China’s economy continues to struggle. Manufacturing is gaining strength, but exports are falling, consumption is weak, and the property sector is terrible. The service sector has lost over 12 million jobs and China is no longer reporting youth employment stats. It is expected that China will deploy some level of fiscal stimulus, including some deregulation for foreign investors. As it relates to global GDP, expect growth reduction. The U.S. economy won’t be overtaken by China anytime soon.

Looking Ahead:

Historically September is the weakest market month of the year. A potential UAW (United Auto Workers) strike would certainly exacerbate the market volatility. With earnings season in the rearview mirror, it is all about taming inflation and shooting for a soft landing.

The recession topic appears to be losing steam. Stock selection remains key, cash is beneficial and short duration U.S. Treasury Bills are an excellent piece of the puzzle. The S&P 500 is hitting resistance levels but should break through.

We are favoring Energy and Industrials for select opportunities. We anticipate a positive Christmas market rally at year-end. We continue with cautious optimism.
 

GN&Co