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Market Commentary - August 2023

Read the Summer 2023 WAA for our Market Quicktakes, Review and Outlook, and Much More

August 2023

Stocks surged in July led by small-caps
despite Fed’s 11th rate hike


Stocks across the globe surged in July to hit high water marks for the year. Small-caps, as measured by the Russell 2000, led the charge gaining 6.1%. The mid-cap S&P 400 rose 4.1%, and combined showed more market breadth, which had been dominated by large-cap growth in the first half of the year. Both the Russell 2000 and S&P 400 joined the S&P 500 and Nasdaq with double-digit gains YTD, up 13.7% and 12.3%, respectively.

The tech-heavy Nasdaq and S&P 500 rose for the fifth straight month and continue to lead YTD, up 37.% and 19.5%, respectively. Rebounding sharply from a disastrous 2022, mega-cap tech has fueled the outsized gains. The Dow Jones Industrial Average, which has lagged all year, gained 3.5% for the month. However, during one stretch the Dow rose 13 straight days, which was one day off the all-time record set in 1987.

US GDP (Gross Domestic Product) grew at an annualized 2.4% pace in Q2, beating expectations of 2.0%. Unemployment dipped to 3.6% in June and has remained under 4% since January 2022, as job growth has remained strong. More economists are starting to think the US may avoid a recession, despite the Fed’s aggressive inflation fighting rate hikes. That lands more in the soft-landing scenario; however, a mild recession remains in the cards.

Overseas, stocks posted solid gains as well in July. The developed market benchmark MSCI EAFE index gained 3.2%, ending July up 13.1% for the year. The ECB (European Central Bank) raised rates another 0.25% in its inflation fight, which has been showing encouraging signs of falling like in the US. The MSCI Emerging Markets index jumped 5.8%.

The Federal Reserve raised policy rates 0.25% to 5.25%, as expected, at its July FOMC meeting. It is the highest Fed Funds rate in 22 years and was the 11th rate hike since last March totaling 5.25% to bring inflation down to its target 2.0%. Headline CPI inflation has dropped 67% from its 9.1% peak last June to 3.0% in June 2023. Core inflation, taking out volatile food and energy prices, has been stickier but has declined to 4.8%, or 27% from its peak of 6.6% last September. Housing/Rent costs have remained stubbornly high. The Fed noted more rate hikes may be needed by year-end but will be data dependent; however, markets are expecting a pause at its September meeting, and about a 30% chance of another 0.25% by year-end. We are moving closer to the end of the Fed rate hike cycle if we are not there already.

The benchmark 10-year Treasury Note yield rose 0.16% in July to 3.97%, on the stronger-than-expected economic data. 30-year mortgage rates remained above 7% at 7.38%. The Bloomberg Aggregate Bond Index dipped 0.1% in July and is up 2.0% YTD.

Aside from a bumpy February and early March, the markets have been very strong through July, mounting a significant rebound from last year. Long-term investors have been rewarded. As noted in our Summer Wealth Asset Advisor, a consolidation or pullback would not be a surprise in late summer. However, we remain cautiously optimistic for year-end and investors should stay disciplined and focused on the long-term.

July QuickTakes

  • Stocks rose sharply across the board in July, led by small-caps surging 6.1%; mid-caps jumped 4.1% and showed more market breadth
  • Both the Russell 2000 and S&P 400 joined the S&P 500 and Nasdaq with double-digit gains YTD, up 13.7% and 12.3%, respectively 
  • Nasdaq and S&P 500 rose for the fifth straight month and lead YTD, up 37.% and 19.5%, respectively
  • Overseas, developed market stocks posted strong gains in July, with the benchmark MSCI EAFE rising 3.2%; Emerging Markets gained 3.2%
  • The Fed raised interest rates another 0.25% in July, as expected, for its 11th straight rate hike in its fight to lower inflation, which has been succeeding; June CPI fell to 3.0% year-over-year and down from 9.1% last June
  • Interest rates rose across the yield curve in July; the benchmark 10-year Treasury Note yield rose 0.16% to 3.97% in July, and the Bloomberg Aggregate Bond Index fell 0.1%

August Update

The month of August is off to a bumpy start, with global markets off 1%-5% from their July close. As noted, a consolidation or pullback was likely at some point this summer given the market’s very strong returns through July. Leading mega-cap technology stocks are susceptible to some short-term profit taking. The market continues to handicap the potential recession scenario, which has remained in the soft landing/mild recession category. A stronger-than-expected Q2 GDP has raised some expectations that the US may avoid a recession altogether.

Inflation remains a focal point for the Fed and any future rate hikes. A better-than-expected July CPI reading, though it ticked higher by 0.2% in July to 3.2%, was offset by a slightly higher Producer Price Index reading, which elevated interest rates and dampened equity markets.

The market environment for 2023 has been positive and encouraging but remains challenging given the Fed uncertainty. While some market turbulence can be expected, we remain cautiously optimistic given we are closer to the end of the Fed’s aggressive rate hike cycle. Market consolidations or pullbacks are a normal process, especially after outsized gains.  We continue to encourage investors:

  • Remain well-diversified
  • Maintain discipline and patience
  • Focus on the long-term
  • Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.   

~Your Nelson Securities Team    

*Past Performance is No Guarantee for Future Results