Market Update - August 26
by Justin J. Long CFP® on Aug 26, 2023 8:00:00 AM
Congratulations on surviving Hurricane Hilary and the subsequent rains that have followed! Personally, we were very thankful that it was mostly a dud (especially compared to the hurricanes I experienced living in Florida).
A big congratulations to Spain and its supporters, who won the Women's World Cup this past Sunday! Our sons had a blast having middle-of-the-night watch parties in our house during the tournament. They were fun for mom and dad too, though we are also very happy to go back to our US-time scheduled sporting events and regular sleep schedule. What fun events have marked the end of your summer?
And now onto the weekly recap:
It was a generally good week for the mega-cap names and a relatively lackluster week for the broader market. To wit: the market-cap weighted S&P 500 rose 0.8% this week while the Invesco S&P 500 Equal-Weight ETF (RSP) posted a fractional loss. The Russell 2000 was down 0.3% for the week and the S&P Midcap 400 Index was flat. The Nasdaq Composite gained 2.3% and the Dow Jones Industrial Average declined 0.4%.
With their gains this week, the S&P 500 and Nasdaq Composite broke a three-week losing streak.
There wasn't a lot of consistency in the trading action this week, which saw its share of gyrations in a week accented with light volume and big news items that included the July Existing Home Sales and New Home Sales reports, the preliminary Manufacturing and Services PMI readings for August, NVIDIA's (NVDA) earnings report, results from a large and diverse batch of retailers, and Fed Chair Powell's policy-oriented speech at the Jackson Hole Symposium.
- Existing home sales were slightly weaker than expected, impeded yet again by limited supply and affordability pressures from high mortgage rates.
- New home sales were slightly stronger than expected, driven by sales of more moderately priced homes as higher building costs crimped the supply of lower-priced homes while higher mortgage rates contributed to affordability pressures across the spectrum.
- The preliminary Manufacturing and Services PMI readings showed a deceleration in activity from July and an ongoing contraction in the manufacturing sector.
- NVIDIA delivered another blowout earnings report, replete with much stronger than expected guidance, yet the stock struggled to hold its gains after the report.
- The results from the retailers were a mixed bag but comments from Macy's (M) about weakening consumer credit trends, and disappointing results and/or guidance from Dick's Sporting Goods (DKS), Dollar Tree Stores (DLTR) and Foot Locker (FL) that were attributed in part to inventory shrink (i.e., theft), overshadowed good news from other reporters.
- Fed Chair Powell stuck by the Fed's 2.0% inflation target; he reiterated that the process of getting inflation back down to 2.0% still has a long way to go; and he acknowledged that the Fed will raise rates again if it is appropriate. Nothing he hasn't said before. What he didn't say is that the Fed is thinking about cutting rates, yet that omission wasn't a surprise either.
The best-performing sectors this week were information technology (+2.6%), consumer discretionary (+1.1%), and communication services (+1.0%). The commonality is that they all have mega-cap stocks under their roof. The energy sector (-1.4%) was the biggest decliner this week with oil prices fading some on continued concerns about China's weakening economy.
That weakening prompted the PBOC to cut its one-year loan prime rate by 10 basis points to 3.45% on Monday and officials to urge financial institutions to assist in stabilizing the stock market. On a related note,Reutersreported Friday that China is planning to lower the duty on stock trading by 50%. China's Shanghai Composite declined 0.6% on Friday and lost 2.2% for the week.
Separately, the Treasury market had its own gyrations this week. The 2-yr note yield saw a trading range that spanned from 4.92% to 5.10%. It settled the week at 5.05%, up 14 basis points for the week. The 10-yr note yield saw a trading range that spanned from 4.18% to 4.35%. It settled the week at 4.24%, down one basis point for the week.
The U.S. Dollar Index was up 0.8% for the week to 104.19.
Stocks had a mixed showing today in a lightly traded session. Buy-the-dip action in the mega cap space led to the outperformance of the Nasdaq Composite (+1.6%) and helped limit losses elsewhere. The major indices had been drifting lower in the early going before bouncing off their lows around 12:00 p.m. ET with no specific news to account for the improvement.
Notably, Treasury yields, which had been rising and keeping pressure on stocks, started to pullback from their highs around the same time that the stock market hit its worst levels of the session. Ultimately, the major indices settled near their best levels of the day, which had the S&P 500 just a whisker shy of 4,400. The S&P 500 hit 4,407 at its high of the day.
The 2-yr note yield settled eight basis points higher at 4.99% after reaching 5.00% earlier. The 10-yr note yield rose nine basis points to 4.34%, which is its highest level since 2007, after hitting 4.35% earlier. The 30-yr bond yield rose eight basis points to 4.46%, hitting its highest level since 2011.
Mega cap stocks, which had already been outperforming due to buy-the-dip interest and presumably some safe haven trading, drove a lot of the late afternoon rally. The Vanguard Mega Cap Growth ETF (MGK) rose 1.5% while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat.
Tesla (TSLA 231.28, +15.79, +7.3%) and NVIDIA (NVDA 469.67, +36.68, +8.5%) were top performers from the mega cap space. NVDA, which reports earnings after the close on Wednesday, traded up after HSBC raised its price target to $780 from $600. TSLA, meanwhile, had declined nearly 30% since its high July 19 coming into today.
S&P 500 sector performance was mixed. Information technology (+2.3%), the most heavily weighted sector in the S&P 500, outpaced the remaining ten sectors by a decent margin. Palo Alto Networks (PANW 240.81, +31.12, +14.8%), which reported better than expected results after Friday's close, was the largest percentage gainer in the sector. The interest rate sensitive real estate sector (-0.9%) saw the largest decline in today's session.
Some angst ahead of Fed Chair Powell's speech Friday at the Jackson Hole Symposium also contributed to the weakness in the Treasury market today after aWall Street Journalarticle by Nick Timiraos discussed why the neutral rate may need to be higher.
Festering concerns about China's disappointing growth remained a limiting factor for stocks today. On a related note, the People's Bank of China lowered its one-year loan prime rate by ten basis points to 3.45% while the 5-yr rate was left unchanged at 4.20% against expectations for bigger cuts.
There was no U.S. economic data of note today, but tomorrow's calendar features the Existing Home Sales report for July (Briefing.com consensus 4.15 million; prior 4.16 million) at 10:00 a.m. ET.
Stocks had a mixed showing in another lightly traded session. Market participants were eyeing the price action in Treasuries again, which was somewhat spastic and helped to keep the stock market in check.
In the early going, relative strength from the mega cap space had been driving Nasdaq gains and limiting losses elsewhere. The S&P 500 for its part had been trading above 4,400 at its high of the day before quickly slipping below that level. The S&P 500 failed to breach 4,400 on a few retests, which invited more selling interest in the afternoon trade.
The major indices ultimately settled the session near their worst levels of the day. The Dow Jones Industrial Average fell 0.5%, the S&P 500 fell 0.3%, and the Nasdaq rose 0.1%.
Weak bank stocks were a notable overhang for the broader market after S&P downgraded the credit ratings of multiple banks, noting concerns about funding risks from rising rates and weaker profitability. Additionally, retailer Macy's (M 12.66, -2.07, -14.1%) talked about weakening consumer credit conditions in its business, and that acknowledgment was another weight on the banks. The SPDR S&P Regional Banking ETF (KRE) fell 2.4% and the SPDR S&P Bank ETF (KBE) fell 2.0%.
Macy's was down sharply following its earnings report and Dick's Sporting Goods (DKS 111.53, -35.51, -24.2%) was another big loser after reporting earnings. Dick's came up well shy of consensus earnings estimates and attributed its disappointing profits and guidance to inventory shrink (i.e. theft). Lowe's (LOW 225.74, +8.15, +3.8%) went against the grain, though, and posted a nice gain after its quarterly report.
Homebuilders outperformed the broader market, boosted in part by an existing home sales report for July that continued to show a lean supply of homes for sale. The SPDR S&P Homebuilder ETF (XHB) rose 0.3%. The iShares U.S. Home Construction ETF (ITB) rose 0.8%.
The S&P 500 financials sector (-0.8%) saw the largest sector decline due to its weak bank components. The real estate sector (+0.3%), meanwhile, led the outperformers.
Treasury yields declined overnight before nudging higher after the cash open. Yields ultimately settled below their highs of the day. The 2-yr note yield note yield rose five basis points to 5.04% and the 10-yr note yield fell one basis point to 4.33%.
Today's economic data was limited to the existing home sales report for July. Existing home sales decreased 2.2% month-over-month in July to a seasonally adjusted annual rate of 4.07 million (Briefing.com consensus 4.15 million) from an unrevised 4.16 million in June. Sales were down 16.6% from the same period a year ago.
- The key takeaway from the report is that the inventory of existing homes for sale remains tight and affordability continues to be adversely impacted by rising prices and higher mortgage rates, all of which is also acting as moving deterrents for existing homeowners.
Stocks had a strong showing today, supported by a drop in market rates and strong mega caps. The major indices all closed with gains ranging from 0.5% to 1.6%, although volume was still light at the NYSE. Today's upside moves brought the S&P 500 back above 4,400, which acted an area of resistance yesterday.
Market rates started to move lower overnight in response to a batch of soft August PMI data out of Europe. Treasuries extended their rally following the release of some softening Manufacturing and Services PMI readings for the US after the stock market opened. The 2-yr note yield fell 11 basis points to 4.93% and the 10-yr note yield fell 13 basis points to 4.20%.
NVIDIA (NVDA 471.16, +14.48, +3.2%) was among the top performers from the mega cap space ahead of its earnings report after today's close. Apple (AAPL 181.22, +3.89, +2.2%) and Microsoft (MSFT 327.00, +4.54, +1.4%) also logged sizable gains on no news. Those moves helped to fuel a 1.6% gain in the Vanguard Mega Cap Growth ETF (MGK) and a 1.1% gain in the market-cap weighted S&P 500.
Market internals reflected fairly broad buying interest under the index surface. Advancers outpaced decliners by a 7-to-2 margin at the NYSE and a 2-to-1 margin at the Nasdaq.
Ten of the 11 S&P 500 sectors logged a gain led by information technology (+1.9%), which was boosted by its mega cap components. Communication services (+1.9%) was another top performer, drawing added support from a big gain in Netflix (NFLX 427.55, +14.38, +3.5%) after it garnered some supportive comments from Oppenheimer.
The energy sector (-0.3%) was the lone holdout in negative territory by the close.
Retailers headlined the earnings calendar since yesterday's close. Foot Locker (FL 16.64, -6.56, -28.3%) and Peloton (PTON 5.41, -1.58, -22.6%) sank following their earnings results and/or guidance while Abercrombie & Fitch (ANF 50.86, +9.69, +23.5%) registered an outsized gain after beating earnings estimates and raising guidance.
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -4.2%; Prior -0.8%
- August S&P Global US Manufacturing PMI - Prelim 47.0; Prior 49.0
- August S&P Global US Services PMI - Prelim 51.0; Prior 52.3
- July New Home Sales 714K (Briefing.com consensus 701K); Prior was revised to 648K from 697K
- The key takeaway from the report is that new home sales activity, which is measured on signed contracts, was driven by sales of more moderately priced homes as higher building costs crimped the supply of lower-priced homes while higher mortgage rates contributed to affordability pressures across the spectrum.
The major indices closed with sizable losses on the heels of NVIDIA's (NVDA 471.74, +0.58, +0.1%) blowout earnings report that was replete with much better than expected Q3 guidance and a new $25 billion share buyback plan. Things looked different at the open, though, with many stocks building on yesterday's gains.
Mega cap stocks rolled over quickly, however, and never regained their opening momentum, which weighed heavily on the broader market. Ultimately, the major indices closed near their lows of the day, which left the S&P 500 below 4,400.
The disappointing price action after NVIDIA's report likely caught many participants by surprise and became its own downside catalyst, which invited increased selling interest. The Vanguard Mega Cap Growth ETF (MGK), which had been up as much as 0.9% at its high, registered a 2.0% loss today. The Invesco S&P 500 Equal Weight ETF (RSP), which had been up as much as 0.6% earlier, closed with a 1.0% loss.
Weak semiconductor stocks were another overhang for the broader market, falling prone to a sell-the-news reaction. The PHLX Semiconductor Index sank 3.4%. Even NVDA, which had been up as much 6.6% today, closed near its low of the day with a measly 0.1% gain.
Other notable laggards included Dow component Boeing (BA 217.31, -11.27, -4.9%), which said a new flaw found in the 737 MAX will slow deliveries in the near term, T-Mobile (TMUS 133.32, -3.01, -2.2%), which said it is going to cut approximately 7% of its staff, and Dollar Tree Stores (DLTR 123.88, -18.34, -12.9%), which disappointed with its Q3 outlook.
All 11 S&P 500 sectors closed in the red with losses ranging from 0.2% (financials) to 2.2% (information technology).
Treasury yields settled slightly higher, keeping pressure on stocks, following another encouraging initial jobless claims report and ahead of Fed Chair Powell's speech at the Jackson Hole Symposium on Friday about the economic outlook. The 2-yr note yield rose eight basis points to 5.01% and the 10-yr note yield rose four basis points to 4.24%.
Reviewing today's economic data:
- Initial jobless claims decreased by 10,000 to 230,000 (Briefing.com consensus 240,000) for the week ending August 19 while continuing jobless claims decreased by 9,000 to 1.702 million for the week ending August 12.
- The key takeaway from the report is that the leading indicator of initial claims is still leading the market to believe that the labor market remains tight, which is something that won't escape the Fed's eye.
- Durable goods orders declined 5.2% month-over-month in July (Briefing.com consensus -4.0%). Excluding transportation, durable goods orders increased 0.5% month-over-month (Briefing.com consensus 0.2%).
- The key takeaway from the report, other than July's weakness was driven predominately by transportation, was that business spending transpired at a tepid pace, evidenced by the 0.1% increase in new orders for nondefense capital goods excluding aircraft.
- Weekly EIA Natural Gas Inventories showed a build of 18 bcf versus a build of 35 bcf last week.
The stock market had its ups and downs today, but ultimately, it finished the day in an upbeat manner that saw the major indices settle near their best levels of the session. The positive session, which came on another day of low volume, was in question shortly after Fed Chair Powell gave his much anticipated speech at the Jackson Hole Symposium. There were some efforts to spin that speech as being more hawkish than expected as the market retreated into negative territory, yet the speech didn't contain any surprising revelations.
The Fed Chair stuck by the Fed's 2.0% inflation target; he reiterated that the process of getting inflation back down to 2.0% still has a long way to go; and he acknowledged that the Fed will raise rates again if it is appropriate. These are all things he said following the last FOMC meeting.
His concluding remark that the Fed "...will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data" was a bit of a sticking point for the market, not because of what it revealed, but because of what it did not say. Specifically, there was no mention here, or anywhere in the speech, that the Fed is thinking about cutting rates.
Again, though, following the July 25-26 FOMC meeting the Fed Chair said it is unlikely that the Fed would cut rates this year, so the omission of any rate-cut possibility in today's speech should not have been regarded as a truly hawkish omission.
Seemingly resigned to accept what it heard in the speech at its unsurprising face value, the stock market regrouped and got back on a winning track. It did so with the help of renewed buying interest in the mega-cap stocks and some generally broad-based buying interest that left all 11 S&P 500 sectors in positive territory by the closing bell.
The Invesco S&P 500 Equal-Weight ETF (RSP) increased 0.5%; the Russell 3000 Value Index added 0.5%; and the Russell 3000 Growth Index rose 0.7%.
The best-performing sectors were consumer discretionary (+1.1%), energy (+1.1%), industrials (+0.9%), information technology (+0.8%), and utilities (+0.8%). Gains for the other sectors ranged from 0.2-0.6%.
The communication services sector (+0.2%) was a relative laggard but deserves some praise for rebounding from a 1.7% loss at its worst levels of the day.
Boeing (BA 223.42, +6.11, +2.8%) was the best-performing component in the Dow Jones Industrial Average one day after being the worst performing component in the Dow Jones Industrial Average. Today's turnaround was helped by aBloombergreport that Boeing is getting ready to resume deliveries of its 737 MAX to China. 25 of the 30 Dow Jones Industrial Average components finished higher.
Away from the stock market, the Treasury market endured its own gyrations. The 2-yr note yield went as high as 5.10% before settling at 5.05%, up four basis points from yesterday's settlement. The 10-yr note yield touched 4.27% soon after Fed Chair Powell's speech but settled the day unchanged at 4.24%.
Strikingly, the low for the S&P 500 today coincided roughly with the 10-yr note yield hitting its high for the day.
- Nasdaq Composite: +29.8% YTD
- S&P 500: +14.7% YTD
- S&P Midcap 400: +6.1% YTD
- Russell 2000: +5.2% YTD
- Dow Jones Industrial Average: +3.6% YTD
Reviewing today's economic data:
- The final reading of the University of Michigan Consumer Sentiment Index for August came in at 69.5 (Briefing.com consensus 71.2) versus the preliminary reading of 71.2. The final reading for July was 71.6, which marked the highest level since October 2021. In the same period a year ago, the index was at 58.2.
- The key takeaway from the report is that it consumers think the rapid improvements seen in the economy in the past three months have moderated, making them more tentative about the outlook.
The data provided is for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. The information contained here is not guaranteed as to accuracy or completeness. All economic and performance information is historical and does not guarantee future results.
The Dow Jones Industrial Average is a price-weighted index comprising 30 widely traded blue chip U.S. common stocks. The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on the NASDAQ stock exchange. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. The Cboe Volatility Index (VIX) shows the market’s expectation of 30-day volatility and is constructed using the implied volatilities of a wide range of S&P 500 Index options. Weekly and year-to-date figures for the VIX show percentage changes, not investment returns. The Russell 2000 Index tracks the performance of approximately 2,000 publicly traded small-cap companies in the United States. It is not possible to invest directly in an index.
The Treasury yield curve is derived from available U.S. Treasury securities trading in the market and is provided directly by the U.S. Federal Reserve. The spread measures the difference in yield between two government securities. A normal (positive) yield curve occurs when longer-term rates are higher than shorter-term rates. The opposite holds true for an inverted yield curve. Year-to-date changes in U.S. Treasury bond yields are shown in basis points (bps). One hundred basis points equals one percent.
Oil prices are represented by West Texas Intermediate (WTI) crude oil.
The G20 countries comprise a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85% of global gross domestic product, and over 75% of global trade.
We strive to provide relevant and value-added content to help our current and future clients stay updated on news that impacts markets.