Market Note – August 29, 2023

By Hightower Great Lakes on August 29, 2023

Jackson Hole Narrative Moves Rates Higher

Fed Chair Jerome Powell remained hawkish and left the door open for another pause at September’s FOMC meeting. The key points were that the economy remains strong (Atlanta Fed GDPNow is currently running at 5.9% y/y GDP growth in 3Q), the labor market continues to be tight and the Fed’s 2% inflation target remains in place. Policy decision making will continue to hinge on incoming data. 

Chart 1: Yield Curve Entirely Above 4%[1]

Banks Weak, Oil Higher

Private credit is filling liquidity gaps for businesses seeking loans. Bank stocks are underperforming the broader index and the group is trending lower given the bear steepening, whereby the long end of the curve continues to rally, which is reducing banks’ book value. Even with lower book value the sector is cheap and the top 20 banks in the country have ample capital levels and historically low Non-Performing Loans and Delinquency rates.

Chart 2: Banks Underperforming Equity Markets[2]

On the other end, oil has been trending higher and is now 24% above June lows. Energy companies have exhibited capex discipline as they generate significant free cash flows and return that cash in buybacks and dividends. It’s interesting to note that in the past month the energy sector (XLE) has outperformed the Technology sector (XLK) by 770 bps – further proof that the market is broadening out beyond the “magnificent 7.” 

Another commodity, copper, which is often a proxy for expansive economic activity (e.g., housing, industrial facilities, autos, electronics), is showing resilience. This has led the industrial sector (XLI) to outperform the technology sector (XLK) by 200 bps. 

Chart 3: Commodities Strengthening and Finding Support[3]

Chart 4: Equity Market Breadth Developing with Energy and Industrials, Outperforming Tech

EPS and Manufacturing PMI Correlation

Corporate earnings and manufacturing PMI have historically maintained a strong correlation. We believe we are in the bottoming process for PMIs, and regional Fed surveys have likely led to earnings near a trough for this cycle. 

Chart 5: Earnings Expectations Indicate Manufacturing Upside[4]

Housing and auto strength are helping the economy, along with fiscal policy like tax refunds. We continue to monitor for cracks in employment or lending activity, as the economy continues to tighten. So far, the consumer remains confident, supported by jobs and wages, and indicated by company commentary and spending trends. The Atlanta Fed GDP Now Model is projecting 5.9% Q3 GDP – a surprising acceleration.

The Week Ahead

Earnings – Tuesday: SJM; Wednesday: CRM, CRWD, CHWY; Thursday: AVGO.

Economics – Monday: Dallas Fed Index (August); Tuesday: S&P Case-Shiller Home Prices (July), Consumer Confidence (August), JOLTS Job Openings (July); Wednesday: ADP Employment Survey (August); Thursday: Core PCE (July), Chicago PMI (August); Friday: Nonfarm Payrolls (August), Unemployment Rate (August), ISM Manufacturing (August).

Return for Selected Indices^[5]

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Click here to read last week’s Market Note (8/25).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of August 28, 2023.

[2] Source: FactSet (chart). As of August 28, 2023.

[3] Source: FactSet (chart). As of August 28, 2023.

[4] Source: FactSet (chart). As of August 28, 2023.

[5] Source: Bloomberg. As of August 28, 2023.