August 2023 Stock Market Commentary

Global equities cooled in August after a hot start to the year, with the S&P 500 giving up -1.6% on the month for a +18.7% gain so far in 2023.

Smaller companies, which are generally more volatile than their blue-chip counterparts and have been tossed about this year by economic and interest rate uncertainty, fell -5.0% in August.

The Russell 2000 index is up +9.0% year-to-date. In a similar vein, overseas equities lost -4.5% this month for a +8.8% year-to-date return on the MSCI ACWI ex-US index.

Within fixed income, bond prices fell on higher interest rates, as investors grappled with the possibility that this resilient economy may result in stubbornly high bond yields. The Bloomberg Aggregate Bond Index fell -0.6% in August, with the ten-year Treasury yield hitting its highest point since 2007. The index is now up just 1.4% YTD.

Commodity prices moved further into negative territory for the year as inflation concerns fade from the headlines, as the Bloomberg Commodity Index lost -0.8% in July (-2.8% YTD).

We rely on our data-driven Three Dials to help us parse this ever uncertain investment landscape. During the month of August, we had one change in our dial readings, which we outline below:

1. Market Sentiment and Momentum: (Positive ➕)

One month of selling in equities is not enough to dampen what has been a strong year across size and geography. All major indexes exhibit favorable technical setups, holding positive upward trends with plenty of room to run before recovering all-time highs.

This small pullback may be a result of overexuberance, but investor sentiment surveys show that bullish attitudes have returned to a healthy level, which leaves our Momentum Dial in a Positive position.

2. Economic Fundamentals: (Negative ❌)

Economic data continues to be a mixed bag, reflecting the uncertainty over the direction of the economy. On the one hand, manufacturers worldwide are cutting orders in anticipation of a potential slowdown, and consumer survey data paints a pessimistic view of future activity.

That said, hiring continues to grow across most sectors of the economy, with workers pouring back into the job market looking to fill the 8.8 million open jobs in the US. On balance, our Fundamental Dial retains its Negative reading.

3. Valuation: (Negative ❌ - Downgrade from Neutral)

Investing is more than just a comparison of stocks versus bonds. But, with stocks in the midst of a double-digit earnings decline while bonds are paying yields at multi-decade highs, the cost of owning equities now seems high.

According to Bespoke Investment Group, the post-COVID performance gap between stocks (+80%) and bonds (-11%) is the widest since March 2000. Stocks are once again “expensive” by our metrics, so our Valuation Dial reverts to Negative.

The shift in our Valuation Dial pulls our composite Three Dials reading back into a Moderately Defensive position, with two dials Negative and one dial Positive

Sources: Morningstar, BEA.Gov, Conference Board