Market Update: August 18, 2023

Welcome to the Weekly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth, and here’s what happened in the market this week.

 

We’ve had a bit more volatility these last couple of weeks. Since reaching that peak on August 1, the market has declined about 4.5% peak-to-close of market on August 17. The 4.5% decline has been gradual over the last two weeks and not very violent. As the market approached the August 1 peak, it became very overbought so a pullback here is not surprising.

In the news this week, mortgage rates surpassed the 7% benchmark yesterday, the highest rate in more than 20 years. At the same time, treasury yields hit new highs sending interest rate sensitive stocks down. And China is having a serious “Lehman Moment” with the collapse of the Zhongrong Internation Trust, Country Garden Holdings, and the Evergrande Group. All three are important developers of Chinese real estate.

Going back to the rising treasury yield issue, I wanted to go over what may be causing some of the weakness within the stock market, particularly with the stocks that have done very well so far this year. Shown in this graph is the QQQ ETF in blue which is effectively the Nasdaq 100, a tech-heavy, growth-oriented index. Also shown is the 5-year real treasury yield which is the yield on a 5-year treasury bond less inflation. These two indices have had an interesting journey beginning in 2022. After the Q’s hit all-time highs at the end of the year in 2021 and inflation started to creep in, real interest rates started to rise. Because the real yield is among the most important inputs in discount rates, as the real yield started to rise, growth stocks began to sell off. This inverse relationship was very strong with a -.88 correlation. For you statistics geeks out there, a negative correlation this high is very significant. At the beginning of 2023, however, this relationship completely reversed. The Q’s started to climb in price as real yields also began to rise. This also showed a strong correlation but this time, it was positive. Finally, something has changed again in August. Real yields have suddenly spiked higher and broken out above their highs set a couple of months ago right at the same time that the Q’s began to sell off.

While short-term rates change almost entirely due to actions from the Fed, long-term rates tend to change due to economic inputs. Long term rates tend to rise primarily due to higher, persistent inflation and higher, persistent economic growth. Those two things tend to come hand-in-hand. Thus, at the moment, the bond market is projecting a combination of higher inflation and higher economic growth. Currently, inflation is right at 3.3%, which is much lower than the peak in 2022, but still well above the 2% target average.

This Weekly Market update is meant to be an enticing appetizer for market and economic insight. For a heartier serving, please check out our podcast, “Up and to the Right” on all your favorite podcasting apps. And for the full course meal, check out our website at signaturewmg.com. As always, don’t forget to smash that subscribe button!

 

Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved August 18, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). QQQ & US constant maturity treasury yield (TIPS) 5 year (Interactive Charts). Retrieved August 18, 2023, from FactSet Database.

3.FactSet Research Systems. (n.d.). Total CPI YoY% & US 10 year treasury yield (Interactive Charts). Retrieved August 18, 2023, from FactSet Database.

 

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