U.S. Markets

After sliding for much of last month on rising yields, credit rating downgrades, and economic weakness out of China, stocks staged a late-August rally to help reduce losses.

The Dow Jones Industrial Average lost 2.36 percent, while the Standard & Poor’s 500 Index dropped 1.77 percent. The Nasdaq Composite fell 2.17 percent.1

Another Weak August

In recent years, August has had a reputation as a weak month for stocks. Since 1986, August stock market performance has ranked as the lowest of all 12 months, returning on average a negative 0.8 percent.2

The August 2023 weakness mirrored historical experience, so the declines seen the past month did not surprise many market analysts, especially given that the market was perhaps due for some consolidation following the strong performance through the first seven months of the year.

August Headwinds

The stock market battled a number of headwinds. Rising bond yields pressured stocks throughout the month, while investors were surprised by a downgrade of U.S. government debt at the start of the month and a credit downgrade of several banks toward the end of the month.

Economic news out of China also proved to be unsettling. Falling exports and fresh troubles in their already stressed property market indicated that China was having more difficulty escaping its economic doldrums—an unfavorable development for global growth.

Earnings Upbeat

The second earnings season came to a conclusion in August with better-than-expected results. As of August 25th, with 485 of the companies in the S&P 500 reporting, 79 percent posted earnings above market estimates. Earnings growth rates were highly dispersed, with the Consumer Discretionary sector showing solid results and the Energy sector reporting softer numbers.3

Toward the month’s end, stocks rallied on “a proceed carefully” rate hike message from Fed Chair Powell at Jackson Hole and weak economic data, which triggered a retreat in bond yields that helped push stocks higher.

Sector Scorecard

The only industry sector posting a gain was Energy, which rose 3.73 percent. The remaining industry sectors ended lower last month, with losses in Communications Services (-2.46 percent), Consumer Discretionary (-2.34 percent), Consumer Staples (-4.77 percent), Financials (-1.81 percent), Health Care (-0.43 percent), Industrials (-1.47 percent), Materials (-2.22 percent), Real Estate (-3.12 percent), Technology (-1.21 percent), and Utilities (-6.61 percent).4

What Investors May Be Talking About in September

All eyes are expected to shift to the Fed’s two-day meeting, which concludes on September 20. Since the Fed’s July 2023 meeting, when the federal funds rate was hiked by a quarter percentage point, inflation reports have shown moderate price increases, perhaps supporting the case for holding off on a rate hike.5

However, economic growth appears to be accelerating. Second-quarter gross domestic product grew at an annualized rate of 2.1 percent, which was a bit faster than the first quarter’s expansion rate of 2.0 percent.6

Q3 Gross Domestic Product (GDP) in Focus

However, third-quarter economic growth may be higher still. According to the Federal Reserve Bank of Atlanta’s GDPNow model, which attempts to estimate current-quarter GDP growth, the economy is forecasted to grow at an annualized rate of 5.0 percent in Q3.6

Although the markets believe that the rate hike cycle is nearing an end, what the FOMC decides on rates this month, and perhaps more importantly, what it signals about what it may do next, may set the tone for the financial market into the final quarter of the year.

World Markets

August weakness was more pronounced in overseas markets as investors grappled with persistent inflation in Europe, the prospect of another rate hike by the European Central Bank, and deepening economic woes in China.

For August, the MSCI-EAFE Index fell 4.10 percent.7

European markets were nearly uniformly lower, with losses in France (-2.42 percent), Germany (-3.04 percent), Italy (-2.74 percent), Spain (-1.41 percent), and the U.K. (-3.38 percent).8

Some Pacific Rim markets were even weaker. Hong Kong lost 8.45 percent, Australia 1.42 percent, and Japan 1.67 percent.9

Indicators

Gross Domestic Product (GDP)

GDP growth in the second quarter was revised downward, from its initial annualized growth estimate of 2.4 percent to 2.1 percent.10

Employment

Hiring moderated in July as nonfarm payrolls increased by 187,000. The increase was below the average monthly jump in the first six months. The unemployment rate fell from 3.6 percent to 3.5 percent, while average hourly earnings increased 4.4 percent from a year ago.11

Retail Sales

Retail sales picked up 0.7 percent in July, exceeding the consensus estimate of 0.4 percent. Excluding auto sales, spending was up 1.0 percent. These were the best gains since January.12

Industrial Production

Industrial production rose one percent in July, driven by a spike in utilities use due to hot weather and an increase in automobile production.13

Housing

Housing starts increased 3.9 percent in July. Permits to build were up slightly (+0.1 percent).14

Existing home sales fell 2.2 percent in July from the prior month and 16.6 percent from a year ago. Low inventory continues to be an overhang, while the number of homes available for purchase remains roughly half that of pre-COVID numbers.15

New home sales increased by 4.4 percent as a shortage of existing homes drove buyers to new construction. Sales were up by 31.5 percent from last July levels.16

Consumer Price Index (CPI)

Consumer prices rose at an annual rate of 3.2 percent in July, coming in slightly below consensus forecasts and somewhat higher than June’s 3.0 percent annual rise. July’s CPI and Core CPI (excludes food and energy) monthly increase was 0.2 percent, in line with expectations.17

Durable Goods Orders

Durable goods orders fell 5.2 percent in July after four straight months of increases. It was the steepest decline since April 2020.18

The Fed

The minutes from the July meeting of the Federal Open Market Committee showed that most members voiced some risks in raising interest rates beyond the quarter-point increase they agreed to implement.

Also acknowledged was the risk that inflation would not come down sufficiently and may require additional rate increases.19

1. WSJ.com, August 31, 2023

2. MarketWatch.com, July 29, 2023

3. LipperAlpha.refinitive.com, August 25, 2023

4. SectorSPDR.com, August 31, 2023

5. FederalReserve.gov, 2023

6. AtlantaFed.org, 2023

7. MSCI.com, August 31, 2023

8. MSCI.com, August 31, 2023

9. MSCI.com, August 31, 2023

10. CNBC.com, August 30, 2023

11. WSJ.com, August 4, 2023

12. CNBC.com, August 15, 2023

13. MarketWatch.com, August 16, 2023

14. CNBC.com, August 22, 2023

15. Finance.Yahoo.com, August 23, 2023

16. CNN.com, August 23, 2023

17. CNBC.com, August 10, 2023

18. Morningstar.com, August 24, 2023

19. WSJ.com, August 16, 2023