Dear Clients & Friends,
The financial markets lived up to their reputation during the month of August, which has a record for being difficult. On the first day of August, markets had to contend with the latest apocalypse-du-jour, which was the downgrading of U.S. long-term debt by the reputable agency, Fitch Ratings. They attributed the adjustment to the “expected fiscal deterioration over the next three years, a high and growing general debt burden, and the erosion of governance.” Many market observers (me included) characterized the downgrade as “ridiculous,” but the stock and bond markets still felt the effects.
Another setback for markets came from Moody’s, another important credit agency. They issued a credit downgrade for 10 small-to-medium-sized banks and 11 larger banks, with a warning of increasing financial risks in the form of higher interest rates, escalating funding costs, and rising risks from banks’ commercial real estate holdings. This wasn’t very surprising considering regional banks and big commercial banks have been under intense pressure for most of the year.
Still, despite the credit-related downgrades, markets were able to navigate their way through the ongoing debate of the country’s financial strength. Better than expected earnings reports, coupled with an optimistic earnings outlook, helped underscore the overall durability of corporate America (emphasis added). That durability showed up in a couple of ways: first, the unemployment rate in the U.S. was at a multi-decade low of 3.5%, so consumer spending has remained resilient. Back-to-school shopping was strong, which is a very positive signal for holiday sales. Second, the housing market defied higher mortgage rates, as the low inventory of houses on the market supported elevated prices. The National Association of Realtors’ chief economist noted that with a strong labor market, the pool of prospective buyers has been enlarged, but with rising mortgage rates and limited inventory, the possibility of home purchases may be “hindered for many”—which has been a sobering topic of conversation with many of our clients recently.
Resilience aside, the market still experienced some volatility with a pullback in the stock market and high bond yields—specifically the 10-year Treasury (the benchmark for rates). Reports of consumer confidence and the number of available job openings also came in softer than expected, which helped alter expectations that the Federal Reserve would raise rates again this year. Although the debate over the need for another rate hike continues as the Fed monitors incoming data, the equity markets responded decisively and resumed their march higher at the end of the month.
So where does that leave the market through year-end, especially since September historically tends to be another difficult month? Since 1950, a strong market performance in the first seven months of the year has been followed by average returns of 5% until year end. Given that the S&P 500 enjoyed a 19% gain for the first seven months of the year, we may be positioned for a positive end to 2023, although potentially with some bumps along the way.
As we turn the page on the summer months and look ahead to fall (undoubtedly my favorite time of year), I would strongly encourage all investors to focus on what you can control (i.e., your savings rate, your asset allocation, your media consumption) and tune out the noise and financial distractions that are ultimately out of our hands (i.e.,market volatility, the economy, interest rates). I sincerely believe your time and energy are better served elsewhere, like spending time with family, friends, and pursuing your favorite hobbies-- like watching NFL football. I know what I'll be doing this weekend :)
As always, thank you for being our client. It's a privilege to serve you. Please reach out to me directly if you have any questions.
Nick Enzweiler, CFP® is a registered representative with, and securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Mariner Independent Advisor Network, a registered investment advisor. Mercer Partners Wealth Management and Mariner Independent Advisor Network are separate entities from LPL Financial.
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