Category Archives: stock market

Current Market Observations

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Equity markets notched another modest win last week, with all major indexes reporting gains (see year-to-date numbers below). We typically only point out the major indexes here at Valley National Financial Advisors, but last week saw gains in small capitalization stocks, a sector left out of this year’s market rally. As measured by the Russell 2000 Index, small caps gained +5.5% last week, which also shifted their year-to-date return into positive territory at +3.5%. A rally in small-cap stocks has been long overdue as most of the big gains this year have been in large-cap and even mega-cap stocks like the “Magnificent Seven.” An equity market rally balanced across all sectors and includes deep depth and breadth of all capitalization stocks rather than just large or mega-cap is healthier and more sustainable over longer periods. Bonds also continued their rally, with the 10-year U.S. Treasury falling 18 basis points to close the week at 4.44%. 

US Economy 

Last week’s equity gains were precipitated by the inflation data released mid-week. The U.S. Inflation Rate fell to 3.24% for October, down from an August 2022 high of 9.06%. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the U.S. Inflation Rate and the U.S. Core Producer Price Index. While the U.S. inflation rate is not yet at the Federal Reserve’s target rate of 2%, the rate has come down dramatically. Furthermore, as we have stated many times here at Valley National Financial Advisors, interest rate hikes take time to work their way through the economy; therefore, even without further rate increases, the inflation rate should continue to track downward from here, given all the tightening that has occurred over the past 18 months. This view, shared by most economists, confirms that the Fed will remain on the sidelines, refraining from further intervention and instead watching and interpreting the data. 

Policy and Politics 

We have talked about global turmoil often and how global issues create uncertainty and fear—both of which markets hate. The Ukraine/Russia War continues to languish well into its second year. Further, the Israel/Hamas War shows no signs of abating. Thankfully, last week’s APEC Summit in San Francisco and the meeting of Chinese President Xi Jinping and President Biden may help to revive the recently cool relations between China and the U.S., the world’s two largest economies. Both countries are moving past pandemic-related inflation periods and experiencing growing economies, so healthy relationships rather than trade wars or tariff spats are important going forward.

What to Watch 

  • We have a Thanksgiving Holiday shortened trading week so Wall Street will be quiet but Main Street will be all buzz on Friday as the Holiday Season will kick off with Black Friday sales hitting the retail space. Next week Cyber Monday starts and by the end of the week we will have some idea of the consumer’s appetite for shopping and spending as many retailers will report 3rd quarter earnings.  

Everyone agrees that the U.S. has avoided a recession in 2023, and the outlook for 2024 is starting to look equally rosy. We remain cautiously optimistic about the markets and the economy, as we have been for over a year. The Fed may be done with interest rate hikes, but even if more hikes are coming, they will be modest, if at all, and minimally impactful. Investors have been rewarded this year for staying the course and remaining invested, a path that is often painful. According to the Nation Retail Federation, consumer spending is expected to be 3-4% higher this holiday season. The U.S. consumer has remained resilient all year and continues to support the economy. Reach out to your financial advisor at Valley National Financial Advisors for help and advice, but more importantly, enjoy the Thanksgiving Holiday Weekend.

Current Market Observations

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We will talk about market headwinds and tailwinds later in the report, but for now, let us just talk about what the markets did last week and year-to-date to remind investors where we really are and what the markets have done. Last week, the Dow Jones Industrial Average added +0.7%, the S&P 500 Index notched a +1.3% return, and the NASDAQ added +2.4%. These returns pushed year-to-date figures higher for each major index, with the Dow at +5.3%, the S&P 500 at +16.6%, and the mega-tech heavy NASDAQ at 32.8%. Certainly, few investors own only index-based investments or only mega-tech equities. Still, most investors with balanced portfolios own a slice of each and, therefore, have captured their risk-related slice of these market returns thus far in 2023. Bonds moved little last week, with the 10-year U.S. Treasury closing at 4.62%, five basis points higher than the previous week.

Global Economy 

There continues to be sufficient geopolitical global turmoil to worry us at Valley National Financial Advisors. The Israeli/Hamas War shows no signs of abating, while the Russia/Ukraine War has dragged on for almost two years; both wars are overheating the already unsteady markets for oil, natural gas, and some food commodities like wheat and creating an ongoing humanitarian crisis. On the flip side of bad news, Chinese President Xi Jinping will meet with President Biden this week in California in a move that officials on both sides hope will ease tensions in the important bilateral relationship between the U.S. and China. While these three events seem distant from the U.S. equity markets, they individually and collectively add uncertainty to the markets, which everyone who reads The Weekly Commentary knows we hate.

Policy and Politics 

In the continuing saga of Washington, DC’s version of “The Gang That Couldn’t Shoot Straight,” we are three days away from another government shutdown. The newly elected Speaker of the House, Mike Johnson, must bring together the contentious parties from both sides of the aisle to pass a budget bill before Friday, November 17, to avoid a government shutdown. While a lot of the actions and bargaining going on in Washington are in partisan brinkmanship, the farce of a looming U.S. Government shutdown has real market implications. For example, last week, the credit rating agency Moody’s lowered the outlook on the U.S. Credit to “negative” from stable, citing large fiscal deficits and declining debt affordability. Moody’s move followed a rating downgrade by another rating agency, Fitch, to A.A. from AAA earlier this year. Although the actions by rating agencies do not have any real market implications, as U.S. Treasury bonds still represent the “risk-free” market measure, moves like this slowly chip away at investor confidence and place a finer negative global spotlight on the U.S. 

What to Watch 

  • Monday, November 13th  
    • 4:30PM: Retail Gas Price (Prior: $3.52/gal.) 
  • Tuesday, November 14th  
    • 8:30AM: U.S. Consumer Price Index MoM/YoY (Priors: 0.40% | 3.70%) 
    • 8:30AM: U.S. Core Consumer Price Index MoM/YoY (Priors: 0.32% | 4.13%) 
  • Thursday, November 16th  
    • 8:30AM: Initial Claims for Unemployment Insurance (Prior: 217,000) 
    • 10:00AM: NAHB/Wells Fargo U.S. Housing Market Index (Prior: 40.00) 
    • 12:00PM: 30-Year Mortgage Rate (Prior: 7.50%) 
  • Friday, November 17th  
    • 8:30AM: U.S. Building Permits (Prior: 1.473M) 
    • 8:30AM: U.S. Building Permits MoM (Month Over Month) (Prior: -4.41%) 
    • 8:30AM: U.S. Housing Starts (Prior: 1.358M) 
    • 8:30AM: U.S. Housing Starts MoM (Prior: 7.01%) 

We have focused on quite a few negative notions this week, which we know is a bit out of character, but there are plenty of positive things to highlight. Contrary to most economists, the U.S. has avoided a recession in 2023, and it looks like 2024 will continue our growth pattern, at least into the first half of the year. Further, inflation has come down from 9% to 3% in just over a year, which means the Fed and most other global central banks are nearing completion in their interest rate hiking cycle. Corporate earnings remain healthy, with most companies reporting earnings that beat Wall Street expectations. Lastly, while the consumer may be getting understandably tired of supporting the economy with their spending, we expect consumer spending to continue well into 2024, especially during the 2023 holiday season. The markets are efficient and always look well into the future rather than watching the past. Investors would do well to do the same. Reach out to your financial advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

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U.S. Equity markets were battered again last week across all sectors, even in the face of strong economic data released that showed 3rd quarter GDP rose +4.90%. Weak and mixed earnings reports and continued global turmoil weighed more heavily on the markets than a strong GDP report. For the week, the Dow Jones Industrial Average fell -2.1%, the S&P 500 Index dropped -2.5% and the NASDAQ fell -2.62%. Meanwhile, the 10-year U.S. Treasury bond yield fell nine basis points to close the week at 4.84% as several large investment houses either lifted their short trade on treasuries or recommended an outright buy for the sector. Both moves rallied bond prices.

US Economy 

As mentioned above, the 3rd quarter U.S. GDP was released last week and showed that the U.S. economy grew by 4.90%, which was more than double the 2nd quarter rate and led by consumer spending on Travel & Leisure and Retail Goods & Services. The economy has been bolstered by a strong labor market and consumer savings accumulated during the pandemic. See Chart 1 below from Valley National Financial Advisors and Y Charts below showing the U.S. GDP and S&P 500 Index since 1950. We purposely picked an exceptionally long-dated chart to show why it is important to think about investing over extended periods rather than over very volatile short periods of time. You will see from the chart that, over time, the S&P 500 Index grows with the U.S. economy, and we continue to believe that the U.S. economy has a long way to go from here, especially over an extended period. Remember, time is an investor’s partner, not their enemy, and it is easy to get caught up in the volatile short-term noise and miss the big picture.

This week, we will look at the latest FOMC report after their two-day meeting ends on November first. Futures markets and traders are currently pricing in another “pause” in interest rate movements, which would be welcomed, but alone not enough to move markets higher. However, if that announcement is paired with a more dovish statement or language akin to “we believe the current interest rate levels are sufficient to combat inflation,” we could see the fear leave the markets to be replaced by positive investor sentiment.

Policy and Politics 

Last week, we emphasized our concerns impacting markets: global regional turmoil, fear of the Fed continuing to raise interest rates and uncertainty related to our political spectrum. With the election of Congressman Mike Johnson (R-LA) as U.S. Speaker of the House, the political sideshow and uncertainly related to it has been lifted, and Washington (rightly or wrongly) can now get back to work with focus on a spending bill that avoids another embarrassing government shutdown. 

What to Watch 

  • Target Fed Funds Rate from the FOMC meeting, released 11/1/23; current upper limit 5.50% 
  • U.S. Initial Claims for Unemployment Insurance for week of 10/28/23, released 11/2/23, prior 210,000 new claims. 
  • U.S. Unemployment Rate for October 2023, released 11/3/23, prior rate 3.8% 

Certainly, the economy continues to grow at a healthy pace despite interest rates rising from 0.00% to 5.50%. However, we are seeing sanguine earnings releases from companies and, along with that, language from CEOs and CFOs pointing to less-than-stellar earnings going forward. We stated before that interest rate hikes take time to work through the economy (typically 9-18 months). The first-rate hike in this cycle was in March 2022, about 18 months ago. We believe the FOMC is close to being finished with rate hikes as inflation continues to creep towards their 2% target (the September 2023 rate was 3.7%). As usual, watch for dovish (lower rates) or pivot (hike to cuts) language from Fed Chairman Jay Powell during the press conference after the FOMC meeting and announcement this Wednesday. We understand there is a lot of conflicting data: a growing economy, healthy consumer spending, strong labor market, less than stellar earnings, high-interest rates hurting the real estate market, and, of course, all equity markets continuing to sell off each week. Sometimes, it is not easy to be an investor. Please reach out to your financial advisor at Valley National Financial Advisors for questions or help.

Current Market Observations

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All three major market indexes posted heavy losses for the week, with the Dow Jones Industrial Average falling –1.6%, the broader S&P 500 Index falling –2.4%, and the tech-heavy NASDAQ falling –3.2%. A flurry of uninspiring earnings releases, higher bond yields, and continued global unrest led to the losses. Bond yields meanwhile moved higher, with the yield on the 10-year U.S. Treasury rising 15 basis points to close the week at 4.93%. Early reports this week show a 10-year Treasury yield moving to 5.00%, a level not seen since 2007. Two weeks ago, in this report, we introduced three words in our commentary that we do not take lightly. The words were turmoil, fear, and uncertainty. In this week’s report, we unpack those words and explain why we remain concerned. 

Global Economy 

The global economy is where turmoil firmly falls on the markets. The Israel/Hamas war continues without any view to a swift or less costly end to the conflict. The Middle East has rarely been a calm place, but relations have certainly been better than they are now among members of the region. For obvious reasons, oil markets and global trade rely on relative calm in the region – major oil producers are located here, and trade through the Suez Canal is a critical route for Asia/Europe trade. The Israel/Hamas War piles onto the Russia/Ukraine War and the China/Taiwan concerns. Hence, our use of the word turmoil – “a state of great disturbance or confusion.”  

Policy and Politics 

The second word we introduced is fear. Why fear? For the first time in many years, investors are fearing the Fed instead of welcoming the Fed and their concomitant market actions. Last week, in a speech to the Economic Club of NY, where we have two Valley National Group investment associates present, Fed Chairman Powell danced around the future path or direction of interest rates, pointing instead to the data as his compass for what the Fed will do next. Investors hoped to hear language stating that future rate hikes were off the table, but that was not the case in both fixed-income and equity markets sold off because everyone was still waiting for the classic Fed Put. The Fed Put happens when markets expect and price in lower interest rates, not higher ones. So, instead of welcoming Fed actions, markets fear future Fed actions. We believe that the economy remains healthy, which is most evident in the consumer who continues to spend. The labor market, where unemployment remains at a near-record low level of 3.8% and housing, while slower, continues to exhibit resilience.  

What to Watch 

  • Merger activity – there are two major M&A (merger & acquisition) deals on the table right now: Exxon/Pioneer Natural Resources and Chevron/Hess. These mega-billion-dollar mergers provide much needed fuel and profits to Wall Street where M&A and IPOs have been quiet recently. 
  • U.S. Single Family Houses sold for September 2023, released 10/25/23, prior 675k. 
  • U.S. Real GDP QoQ for 3rd Quarter 2023, released 10/26/23, prior +2.1% 
  • U.S. Personal Consumption Expenditure Index YoY for September 2023, released 10/27/23, prior 3.48% (Fed’s favored inflation indicator) 
  • U.S. Index of Consumer Sentiment for October 2023, released 10/27/23, prior level of 63. 

We chose the summary for the week to discuss our third word – uncertainty. We have discussed markets hating uncertainty the most out of all worrisome trends. Typically, in a market where fear and turmoil exist, investors are uncertain, and their natural reaction is a flight to quality, which means buying U.S. Treasuries. However, U.S. Treasuries continue to sell off as the Federal Reserve’s surge in debt supply and mixed signals on the rate path weaken fixed-income markets. Furthermore, our leaders in Washington continue to do nothing as they wrangle to simply fill the U.S. Speaker of the House position, notably the third position in line for succession to the U.S. President.  

Uncertainty persists in our leaders, world politics, and the markets, so while it is not unusual for markets to sell off, it is unusual to see such a connected and broad sell-off in all markets in tandem. Treasuries at 5.00% offer investors real after inflation yields. See charts 1 & 2 above by Valley National & Y Charts showing first the U.S. Inflation rate and the 10-year U.S. Treasury yield and second the 10-2-year Treasury Yield Spread.

We expect to see turmoil, fear, and uncertainty in the market until each issue gets resolved over time, and time is always on the patient investors’ side. The patient investor can outlast uncertainty. Reach out to your advisor at Valley National Financial Advisors for advice or questions. 

Current Market Observations

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U.S. stocks ended the week essentially flat. The Dow Jones Industrial Average gained 0.12% on the week, the S&P 500 lost 0.16%, and the NASDAQ fell 0.39%. Last week, U.S. inflation grew to 3.67% from 3.18% the month prior. Additionally, mortgage rates climbed to an average of 7.18% from 7.12%, the highest rate since May 2001. It’s also worth noting that the Index of Consumer Sentiment, a survey of general economic outlook based on a random sample of U.S. households, has fallen to 67.70, a slight drop from the prior month but still significantly ahead from a year ago when it was 58.60 (the higher consumer sentiment, the better). These reports coincide with a slight sell-off in bonds, with the 10-year U.S. Treasury ending the week at 4.33%, seven basis points higher than last Friday. As always, please reach out to your advisor at Valley National Financial Advisors with any questions or concerns.

Global Economy

Though the Federal Reserve has raised rates by more than 500 basis points since January 2022, there has been a limited slowdown in US consumer demand. With the most recent inflation number gaining month-over-month, policymakers are beginning to look at rates from a new perspective: what do rate hikes mean for the supply side of the economy? The argument is that if rates rise too high, they could potentially undermine the benefits of increasing supply, as discussed in a paper presented at Jackson Hole last month. Despite this, we expect the Fed to remain data-driven in its battle to bring inflation down to the 2% target—it is unlikely that they will act solely on this argument moving forward when their action plan has proven relatively effective. Chart 1 below shows the components of inflation that are driven by either demand or supply. 

As of July, Mexico has overtaken China as the United States’s largest trade partner, representing 15% of U.S. imports (versus China’s 14.6%). Chart 2 below shows the trend in U.S. imports since 2017. As U.S.-China relations soured, the share of imports from Mexico and Canada increased significantly over the last six years, making nearshoring to Mexico a much more attractive option. Chart 3 is a map of major industrial parks that produce goods that eventually make their way into the United States—it’s no surprise that most of them are located near the border. As investment into these industrial parks increased, so did the U.S.’s dependence on Mexican goods. Since 2017, all categories of imports have increased except for food and electrical equipment, which decreased. Chart 4 shows each import category and their respective sizes. Chart 5 shows the change in investment in heavy machinery in Mexico since 1993—notice the sharp decline from when tariffs on Chinese goods began in 2018 through 2020 and then the sharp rise once the USMCA was enacted in place of NAFTA. 

What to Watch 

  • Monday, Sept. 18th  
    • 4:30PM – Retail Gas Price (Prior: $3.941/gal.) 
  • Tuesday, Sept. 19th  
    • 8:30AM – Housing Starts (Prior: 3.86%) 
    • 10:00AM – Job Openings: Total Nonfarm (Prior: 8.827M) 
  • Wednesday, Sept. 20th  
    • 2:30PM – Target Federal Funds Rate (Prior: 5.25-5.50) 
  • Thursday, Sept. 21st  
    • 8:30AM – Initial Claims for Unemployment (Prior: 220k) 
    • 10:00AM – Existing Home Sales (Prior: 4.07M) 
    • 12:00PM – 30 Year Mortgage Rate (Prior: 7.18%) 

Current Market Observations

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The equity market ended the week mixed as a rally in tech stocks propelled the NASDAQ and S&P 500 Index higher but failed to pull along the broader Dow Jones Industrial Average. For the week, the Dow Jones ended down 0.45%, the S&P 500 up 0.82%, and the NASDAQ higher by 2.26%. The focus remained heavy on the Federal Reserve to see what monetary policy would come out of their Jackson Hole conference, and spoiler alert, Chairman Powell implied that rates would remain elevated until inflation approaches the 2% target and maintains that level. Across the pond, the Eurozone is struggling to combat inflation, which is still above 5%, suggesting the ECB may have to be more aggressive in its policymaking. Finally, the effects of China’s post-pandemic slowdown are beginning to be felt by trade partners and are causing a net detraction in global growth. 

Global Economy 

Federal Reserve policymakers met last week in Jackson Hole for their annual conference, focusing on monetary policy. Fed Chair Jerome Powell said that the central bank is ready and willing to continue raising rates if inflation does not sustainably trend down towards its 2% target. U.S. inflation printed last month at 3.18%, while it peaked last August 2022 at 9.1%. Remember that the Federal Reserve raised rates consistently in 2022 and through most of 2023—just recently pausing its tightening cycle, which greatly aided in bringing inflation down to 3.18% from 9.1% during that time period. While we have seen some commentary suggesting that the Fed will begin cutting rates by the end of the year, the news from Jackson Hole suggests that we may be in for an extended period of higher rates through at least mid-2024. Chart 1 below shows U.S. quarter-over-quarter (QoQ) GDP plotted against personal consumption QoQ.   

Chart 1: 

While the U.S. received somewhat clear direction from the Fed last week, Europe faces relative silence from Christine Lagarde and the European Central Bank (ECB) leading up to the bank’s Sept. 14th meeting. Inflation has continued to run rampant in the Eurozone and is the core focus of the ECB’s data-dependent policymaking. For reference, EU core inflation (ex-Energy) remains above 5% versus the central bank’s 2% target (the same as the Fed’s target). See Chart 2 showing European inflation data. However, the recent release of Europe’s Purchasing Managers’ Index (PMI) signaled the contraction of private sector activity, meaning there is now more significant downward pressure on inflation. See Chart 3 for both components and composite of PMI charted against each other from 2002 through the present.  

Chart 2: 

Chart 3: 

This year, China’s economy was supposed to drive 1/3rd of global economic growth. For reference, for every 1% gain in China’s growth rate, global expansion is boosted by 0.3%. Unfortunately, the country’s post-pandemic reopening has been fraught with weak data seeping into its trade partners. So far this year, more than $10B has been pulled from China’s stock markets in the longest stretch of net outflows in the country’s history. This does not mean there are no benefits from an economic slowdown in China. For example, China’s slowdown will depress oil prices and lower prices for exported goods. This is good news for other places, such as the U.S. and Eurozone, which are still battling elevated inflation and will benefit from falling Chinese demand. Chinese imports have fallen as demand dropped from pandemic-era highs. See Charts 4 and 5 for Chinese import data. Chart 6 belowshows export prices falling with the Producer Price Index (PPI) and import prices.  

Chart 4: 

Chart 5: 

Chart 6: 

What to Watch 

  • Monday, Aug. 28th  
    • 4:30PM – Retail Gas Price (Prior: $3.984/gal.) 
  • Tuesday, Aug. 29th  
    • 9:00AM – Case-Shiller National Home Price Index (Prior: 302.38) 
    • 10:00AM – Total Nonfarm U.S. Job Openings (Prior: 9.582M) 
  • Wednesday, Aug. 30th  
    • 8:30AM – Real GDP QoQ (Prior: 2.40%) 
    • 10:00AM – Pending Home Sales QoQ/YoY (Priors: 0.26% / -15.60%) 
  • Thursday, August 31st  
    • 8:30AM – Personal Income/Spending MoM (Priors: 0.31% / 0.55%) 
    • 12:00PM – 30 Year Mortgage Rate (Prior: 7.23%) 
  • Friday, Sept. 1st  
    • 8:30AM – Labor Force Participation Rate (Prior: 62.60%) 
    • 8:30AM – Nonfarm Payrolls MoM (Prior: 187.00K) 
    • 8:30AM – Unemployment Rate (Prior: 3.50%) 
    • 11:00AM – U.S. Recession Probability (Prior: 66.01%) 

Federal Reserve policymakers signaled that they remain vigilant in their fight against inflation with the end goal continuing to be a 2.00% target rate. We believe Chairman Powell sees the impact of the aggressive tightening in 2022-23 and hinted that the impact of these hikes has yet to be fully felt across the economy. We think a continued pause in rate hikes at the September FOMC meeting is plausible but, of course, all actions are data dependent. U.S. economic growth remains resilient with a solid jobs market which is boosting consumer spending. The bond market continues to modestly sell off, especially in the short end of the curve, but this move is also offering investors a yield component on bonds that we have not seen in many years. Summer is nearing a close, back-to-school shopping is underway or already done and Wall Street will be getting back from the Hamptons and elsewhere. “Sell-in-May and Go-Away” means traders and portfolio managers will be hitting the floor looking to cement positive returns for year-end bonus season. Also, pay attention to the shifting climate in China as this will impact the global economy. Please reach out to your advisor at Valley National Financial Advisors with questions or concerns.

Current Market Observations

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The Dow Jones Industrial Average ended the week down 2.21%, the S&P500 index lost 2.11%, and the NASDAQ fell 2.59%. Global stocks declined due to concerns about China’s economic conditions and rising global rates. Investors also continue to grapple with inflation concerns. Additionally, the CBOE Volatility Index (VIX) reached its highest level since May 2023 last week, indicating increasing market anxiety. The Federal Reserve is meeting in Jackson Hole, WY, this week—we will be watching this symposium to gauge the Fed’s policy stance going forward. We still believe that the Fed will be able to gently land the economy and avoid a recession despite being seemingly bombarded with news to the contrary.   

Global Economy

According to a recent survey, the projected 3Q GDP growth has surged to 1.8%, a notable increase from the earlier estimate of 0.5% in July, as seen in Chart 1 below. The economy’s strength is driven by resilient consumer spending, supported by recent retail sales data and a strong job market. Economists’ revised projections depict an average U.S. economic growth of 2% this year and 0.9% in 2024, exceeding previous estimates and aligning with more positive global forecasts. Despite inflation concerns, economists foresee a prolonged period of higher interest rates without any imminent rate hikes, as seen in Chart 2 below. The possibility of a rate cut has been pushed to the second quarter of the following year, reflecting their confidence in a more resilient economy. 

Chart 1:  

Chart 2: 

Chinese banks have maintained the key five-year loan prime rate (LPR) at 4.2%, defying predictions for a 15-basis point cut, while ten basis points reduced the one-year LPR to 3.45% (see Charts 3, 4). This unexpected move reflects China’s dilemma in balancing the need to stimulate economic growth with the imperative to ensure the banking system’s stability. The decision is seen as an effort to protect banks’ net interest margins and profitability, which are crucial for financial stability. The Chinese government is grappling with the challenge of bolstering borrowing demand amidst deflationary pressures and waning confidence, all while trying to avoid instability in the financial sector.  

Chart 3: 

Chart 4:  

What to Watch 

  • Monday, August 21st  
  • Retail Gas Price at 4:30PM (Prior: $3.962/gal.) 
  • Tuesday, August 22nd  
  • Existing Home Sales/MoM at 11:00AM (Priors: 4.16M / -3.26%) 
  • Thursday, August 24th  
  • Initial Claims for Unemployment Insurance at 8:30AM (Prior: 239k) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 7.09%) 
  • Friday, August 25th  
  • Index of Consumer Sentiment at 10:00AM (Prior: 71.20) 

While the market has had negative returns in the past few weeks, we remain cautiously optimistic about the U.S. economy and the markets for 2023. Please reach out to your contact at Valley National Financial Advisors with any questions.

Current Market Observations

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Markets ended last week mostly flat, with the Dow Jones Industrial average netting a 0.62% gain, while the S&P500 and NASDAQ lost 0.31% and 1.90%, respectively. Year-to-date returns on all three major indexes remain well in positive territory (see details below). In terms of economic data released last week, the Producer Price Index (PPI) increased month-over-month and year-over-year, which means it is still contributing to inflation despite it slowing considerably. While the Fed is waiting for solid economic data before announcing they won the inflation war, American Consumer’s inflation expectations are declining. The current inflation expectation rate is just 3.3% overall over the next year versus the 3.4% figure that was anticipated in July. Interest rates continued to increase last week, with the 10-year U.S. Treasury increasing seven basis points to end the week at 4.16%.

Global Economy 

U.S. Producer Prices increased in July due to rises in service categories, underscoring the challenges in managing inflation. The Producer Price Index for final demand and the core index, excluding food and energy, rose by 0.3% in July, slightly surpassing predictions. Factors like stabilizing supply chains, limited overseas demand, and shifting consumer spending towards services have eased producer-level inflation. However, recent oil price hikes are reintroducing inflationary pressures. Inflation in healthcare services accelerated, impacting key inflation measures. Recent consumer price data indicating minimal gains might deter the Federal Reserve Bank from raising interest rates in September. The Core PPI, which excludes volatile components like food and energy, increased only 0.3% in July and 2.4% annually, which is getting close to the Fed’s target rate of 2.00%. See the detailed charts below from Bloomberg.

The U.S. housing market has rebounded, recovering nearly $3 trillion in lost value from the previous year’s slowdown. A continued shortage of listings has driven up prices and elevated the total worth of U.S. homes to a record $47 trillion, as reported by Redfin Corp, see Chart 2 below from Redfin. The reluctance of homeowners to relinquish their lower-rate mortgages amid rising borrowing costs has resulted in only 1% of U.S. homes changing ownership this year, the lowest figure in a decade. 

Policy and Politics 

During the upcoming BRICS (Brazil, Russia, India, China, & South Africa) economic summit in South Africa, discussions will revolve around increasing the utilization of local currencies for trade among member states, including establishing a common payments system and potentially forming a technical committee to explore the concept of a joint currency. The focus is not on replacing the U.S. dollar as the global currency but rather on enhancing the use of domestic currencies to foster trade and counterbalance the dominance of the U.S. This is important to us to watch as some BRICS countries are part of the major move in U.S. manufacturing around nearshoring (moving offshore manufacturing physically closer to U.S. headquarters) and friend-shoring (moving offshore manufacturing to trade partners deemed more “business friendly”) since the massive supply chain disruptions that were seen during the pandemic. 

What to Watch 

  • Monday, August 14th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.94/gal.) 
  • Wednesday, August 16th  
  • U.S. Housing Starts / MoM at 8:30AM (Priors: 1.434M / -8.02%) 
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 9.582M) 
  • Thursday, August 17th  
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 248k) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.96%) 

As is typical in August, markets reach a calm/quiet period as Washington, DC, is on vacation with much of the rest of the country and world. Federal Chairman Jay Powell has slowly crafted his economic soft landing (battling inflation with higher interest rates and not sending the economy into a recession). However, the war is ongoing as inflation is still above the 2% target (U.S. Inflation Rate for July 2023 was 3.18%). As noted above, equity markets have slowly increased year-to-date, reflecting strong economic conditions, healthy labor and housing markets, and resilient consumers. Our mantra remains that investors can be cautiously optimistic for the remaining part of 2023.  

Current Market Observations

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Equity markets posted mixed results last week, with the Dow Jones Industrial Average notching a +2.08% return, the S&P 500 Index moving higher by +0.69%, and the NASDAQ Index trailing the broader markets with a –0.57% return for the week. The broadening in equity market returns beyond simply technology stocks has continued for several weeks. This move has been expected as better valuations existed outside of the “magnificent seven” tech stocks that have thus far carried most of the gains in 2023. Year-to-date returns remain indicative of their expected risk levels, with the Dow Jones Industrial Average at +7.54%, the S&P 500 Index at +19.24%, and the tech-heavy NASDAQ at +34.69%. Fixed income markets were largely unchanged on the week, with the 10-year US Treasury Bond moving higher by three basis points to close the week at 3.84%.

Global Economy 

The Federal Open Market Committee (FOMC) meets this week, and most analysts are expecting another +0.25% rate hike, which will put the Fed Funds rate at 5.50% from 0.00%-0.25% at the start of 2022. We expect the Fed will be winding down its recent aggressive rate hiking strategy, which was related to spiking inflation in the United States and elsewhere. See Chart 1 from Valley National Financial Advisors and Y Charts showing the Fed Funds Rate and the U.S. Inflation Rate. The recent U.S. Inflation reading was 2.97%, down from over 9.00% in July 2022, so the Fed’s strategy is clearly working, and their target inflation rate of 2.00% is finally within reach. Still, we expect the path to 2.00% will be lumpy, slower, and longer than the path from 9.00% to 3.00%. 

U.S. Economy & Market Outlook 

Washington is on break until after Labor Day, and that has historically been “good news” for the markets because lawmakers are away and, therefore, unable to impact markets with harmful policies or procedures negatively. After calling for a recession in 2023, as many economists and “market experts” did in 2022, that same group has now walked back their predictions and pushed off any recession or soft-landing until well into 2024. With that said the markets are now focusing on earnings. Thus far in 2023, corporate earnings have been healthy, but markets are forward-looking, and we expect new tailwinds for corporate earnings going forward. Tailwinds will include relief on expenses as inflation continues to abate, normal supply chain operation, and the end of further rate hikes by the Fed. For the past year, we have only had headwinds, and markets have held up well; tailwinds will bring new directions to the market, but again, expect volatility, as always.

What to Watch 

  • Monday, July 24th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.676/gal.) 
  • Tuesday, July 25th  
  • Case-Shiller Home Price Index: National at 9:00AM (Prior: 299.72) 
  • Wednesday, July 26th  
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 9.824M) 
  • Target Federal Funds Rate Upper Limit at 2:30PM (Prior: 5.25%) 
  • Thursday, July 27th  
  • U.S. Real GDP (Gross Domestic Product) QoQ at 8:30AM (Prior: 2.00%) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.78%) 
  • Friday, July 28th  
  • U.S. Core PCE (Personal Consumption Expenditure) Price Index MoM/YoY at 8:30AM (Priors: 0.30% / 4.62%) 
  • U.S. Personal Income MoM (Month Over Month) at 8:30AM (Prior: 0.40%) 
  • U.S. Personal Spending MoM at 8:30AM (Prior: 0.10%) 
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 72.60) 

Equity markets continue to move higher, and the recent broadening of positive returns to cyclical stocks from only technology stocks adds to the breadth the market was lacking. Certainly, our antennas remain active any time the markets move higher with such muted volatility. The current VIX (Volatility Index) is 14.0, a near-record low. 2008/09 VIX measured 81.0 and 76.0 at the peak of the Pandemic. Many investors spent the first half of 2023 on the sidelines waiting for the recession that would never impact the market. Meanwhile, markets have steadily moved higher all year, and new tailwinds have emerged for corporate earnings in the form of lower expenses and a clearer path from the Fed on interest rate moves. Emergent consumer technologies like AI (Artificial Intelligence) might further impact expenses. Though the eventual impact of AI is unknown, one must pay attention to innovation and its potential global importance.

Current Market Observations

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Although last week’s jobs report showed a slowing in hiring during March 2023, equity markets posted another positive week across all three major market indexes, with the Dow Jones Industrial Average leading the way at +1.91% for the week ended April 7, 2023. Meanwhile, the S&P 500 Index notched a decent +1.34% for the week, while the NASDAQ returned +0.62%. Bond prices increased during the week but only modestly, with the 10-year U.S. Treasury bond falling four basis points to close the week at 3.39%. As recently as October 2022, the yield on the 10-year U.S. Treasury was 4.25%, marking a shocking move in rates due to still-unfounded recessionary fears and a clear flight to quality after the mini-banking crisis we saw in March as Silicon Valley Bank & Signature Bank failed.

Last Friday’s employment report from the Bureau of Labor Statistics showed the U.S. added 236,000 nonfarm payrolls in March, below the median economists’ forecast of 239,000 and down from February’s revised figure of +311,000, see Chart 1 below. Oddly, the unemployment rate moved a bit lower to 3.5% from 3.6%, and the labor force participation rate increased from 62.5% to 62.6%. At VNFA, these moves are modest and still point to a strong labor market by any historical measure. We continue to believe the U.S. labor market remains a strong point continuing to underpin the economy.

Investors understand the current objective of Fed Chairman Jay Powell is combatting inflation which peaked last summer at 9.06% and has since tapered to 6.04%, see Chart 2 below. Chair Powell has raised interest rates at a near-historic pace, and last year’s markets showed the result of that with poor returns across all sectors. As inflation comes under control and further rate hikes fade into the sunset, we expect markets to moderate but remain volatile. 

What to Watch

  • Monday, April 10th
    • U.S. Wholesale Inventories MoM at 10:00AM (Prior: -0.42%)
    • U.S. Retail Gas Price at 4:30PM (Prior: $3.606/gal.)
  • Wednesday, April 12th
    • U.S. Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.37% / 6.04%)
    • U.S. Core Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.45% / 5.53%)
  • Thursday, April 13th
    • U.S. Producer Price Index MoM/YoY at 8:30AM (Prior: -0.15% / 4.58%)
    • U.S. Core Producer Price Index MoM/YoY at 8:30AM (Prior: -0.00% / 4.40%)
    • 30 Year Mortgage Rate at 12:00PM (Prior: 6.28%)
  • Friday, April 14th
    • U.S. Export Prices MoM/YoY at 10:00AM (Prior: 0.20% / -0.85%)
    • U.S. Import Prices MoM/YoY at 10:00AM (Prior: -0.14% / -1.05%)
    • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 62.00)

Equity markets finished the week slightly higher, while treasury yields fell slightly. Last week, the BLS (Bureau of Labor Statistics) labor report was right on target, missing median expectations by only a few thousand jobs and indicating a strong labor market as participation increased and the unemployment rate decreased. However, the strong jobs market is still running a bit contrary to the Fed’s rate-hike path. It was expected that the historic pace of rate increases would negatively affect workers and put many out of jobs, which has yet to be seen. Despite the continued strength in this area, inflation has trended downwards from a peak of 9.06% and is currently down to 6.04%, indicating that the Fed is putting up a good fight. We believe the path to 4% is ahead of us, while returning to the 2% average target may take years longer than initially expected.