Higher Rates Weigh on Equities

August 18th, 2023

It was a busy week for investors as they digested a number of market-moving headlines. Ratings agencies remained in the spotlight with Fitch, once again, taking center stage. On Tuesday, the ratings firm announced it was considering a broad downgrade of the banking sector over concerns that interest rates will remain elevated longer than expected. U.S. banks currently hold an AA- average rating, but Fitch’s revaluation could result in more than 70 banks being reduced to an average rating of A+. A downgrade would raise banks’ borrowing costs, compressing banks’ profit margins. Adding to bank woes was the July retail sales report. Consumers, reinvigorated by slowing inflation and healthy wage gains, drove sales higher by 0.70% month-to-month. This was a hot reading, which could get hotter as China’s economic meltdown could lead to more affordable goods prices. The combination of strong consumer spending and Chinese deflation may sustain the spending surge, which markets fretted could keep the Fed hiking. For the week, the Dow slipped -2.21%.

Consumer Spending Coming in Hot

Moderating inflation and healthy wage gains resulted in big summer spending in July. Sales rose 0.70% month-to-month to $696.4 billion. Excluding autos, sales rose an even healthier 1.00%. Both topline and ex-autos sales beat estimates of 0.40%. Amazon Prime Day and competing sales brought out the bargain shoppers, helping push online retail sales up 1.90%. Despite the sweltering heat, sporting goods and related stores saw sales rise 1.50%. Restaurant and bar receipts also posted healthy gains, up 1.40%, boosted by movie and concert goers reveling in the summer’s biggest blockbusters including Barbenheimer (Barbie and Oppenheimer), Taylor Swift, and Beyonce. July retail sales were incredibly strong, having resulted in the Atlanta Fed’s GDPNow model lifting its forecast to a scorching 5.80% GDP growth for Q3.   

China’s Lehman Moment?

In contrast to the strength in U.S. data, China’s economy is taking it on the chin as more and more signs of slowing growth emerge for the world’s second largest economy. Consumer spending, industrial production, and public and private investment reports also missed expectations by a wide margin this week. The poor reports pushed China to revert to its old playbook of hiding or discontinuing economic data to obscure reality in times of weakness. In its most recent instance, China’s Statistics Bureau announced it would stop publishing youth unemployment figures as it reevaluates its reporting methodology. The country is reconsidering whether to count students as unemployed if they are still studying while seeking work. In comparison, the U.S. and other countries do count students as unemployed if they are actively seeking work – irrespective of their student status. In June, 21.30% of 16 to 24 year-olds in Chinese urban centers were out of work. That figure was considered embarrassing to the Communist party and worrisome as well given the rate in December stood at 16.70%. Adding further pressure are concerns over a deepening property debt crisis that some fear will lead to a broader financial contagion within the country. Defaults among Chinese developers are now expanding to the country’s shadowy trust industry, which has been a large lender and derivatives seller within the real estate sector. Many worry that the combination of actual defaults along with poor transparency could result in a sudden collapse in confidence similar to that which predicated the U.S.’s own financial crisis in 2008. While the Communist party will no doubt attempt to backstop any such contagion, eroding fundamentals along with attempts to hide the true reality may ultimately compound the challenge. 

Final Thoughts

Where markets had seen blue skies for a soft landing and lower rates as recently as two weeks ago, this week pessimism grew that the strength in U.S. economic data would put the Fed back on the war path. Equity and fixed income markets sold off in tandem, with the 10-year treasury breaking 4.30% and 30-year mortgage rates rising to their highest levels since 2002. Markets are fickle when it comes to narratives, and sometimes new narratives are simply made up to fit the moves of the market. There is no question that rates moved up sharply this week and equity markets sold off. Those are facts, but whether that was a function of a change in rate and inflation assumptions due to this week’s economic releases, or a function of weak trading volumes coinciding at a time of large government debt issuances is unknowable. Stocks likely took their cues from bonds, however. The FOMC does not meet again until September, and while next week may provide more market clarity into their pause or hike temperament during their annual Jackson Hole Symposium, a lot of data remains to be parsed between now and September. The one thing you can say for certain, however, is that it was a terrible week to be issuing new debt – so be sure to thank your local Congressman.

The Week Ahead

Woodstock for central bankers has arrived! Global central bankers, policymakers, academics, economists, and financial market participants are set to descend on Jackson Hole, Wyoming for the Kansas City Fed’s Annual Economic Policy Symposium. Fed Chair Jerome Powell brought down the house last year in a rousing eight-minute speech that warned of economic pain to come as the central bank moved to raise rates to combat soaring inflation. With inflation now moderating but economic growth remaining strong, Powell looks set to gear his remarks towards central bank policy for 2024. Economic news looks set to take a back seat to Jackson Hole with existing home sales and durable goods orders being the highlights of the week.

Back to Basics

Summer is winding down, and that typically means a shift from more carefree summer days to a busy fall, to the hustle and bustle of back to school, and to a busier work season for many professionals. This last gasp of summer seems like a good time to explore some of the stress relieving strategies that have captured headlines recently. We’ve summarized a few below should you find yourself in need of techniques to stay balanced and calm. 

Earthing or grounding: The Wall Street Journal (WSJ) reported this week that professional athletes, pilots, and other wellness seekers are increasingly trying out a practice called earthing or grounding that proponents say can cure headaches and joint pain, aid in better sleep, reduce inflammation, and provide a myriad of other health benefits. The alternative health practice involves simply standing barefoot in a backyard or somewhere in nature in order to connect to the earth’s natural electric charge. Earthing proponents believe that the body absorbs electrons from the Earth which offers a stabilizing effect. Other more complicated practices of earthing involve purchasing something called a grounding mat that comes with a cable to plug into the bottom hole of any three-pronged outlet. Some companies sell sheets, mattress pads, running shoes, and other products that claim to offer the benefits of grounding. Many traditional medical professionals say the benefits of grounding simply are not grounded in science, but that hasn’t stopped the practice from growing in popularity. On social media platforms like TikTok, the hashtag #earthing has more than 66 million views and #grounding has 199 million.:

Listening to birds: Research has shown that humans gain health benefits simply by listening to birdsongs. Two studies published in Scientific Reports and reported in the Washington Post earlier this summer show a significant positive association between birds and improved mental well-being. Furthermore, the mental health benefits persisted well beyond the bird encounter and were reported in both healthy participants in the study as well as participants who had been diagnosed with depression. A second study found that listening to a six-minute audio clip of birdsong could reduce feelings of anxiety, depression, and paranoia in participants. It is not yet understood how birdsong affects human brains, but neuroimaging studies have found brain responses of stress reduction to other types of exposures to nature.

Sound therapy: An article on Forbes.com addresses the power of sound, noting a variety of studies that have shown that sound can stir human emotions and elicit specific reactions. Certain frequencies and rhythms have been found to slow one’s breathing and heart rate. At Yale University, researchers are studying the connection between sound and the brain with a type of therapy known as a “sound bath.” Sound baths use soothing sounds and vibrations that slow down brain waves and activate the parasympathetic nervous system. People who experience these sound baths and other types of sound therapies report lower levels of perceived stress, lower anxiety, and greater relaxation.

Deep Sighs: A recent study shows the power of a good sigh. Sighs are often seen as an expression of frustration, boredom, or sadness, but they are shown to accomplish stress relief, according to researchers at Stanford University School of Medicine who recently published a study that engaged participants to spend five minutes per day doing one of three different types of deep breathing. Participants in the study reported feeling more positive feelings and fewer negative ones along with reduced feelings of anxiety after participating in daily breathwork. Sighing infuses oxygen into the bloodstream and balances the ratio of carbon dioxide and oxygen in our brain and body. The researchers noted that the participants who practiced a specific type of sighing experienced the benefit of decreased respiratory rate during sleep, which suggests that the five-minute daily breathing exercises had lasting impacts. 

None of these practices or strategies are a substitute for medical care, but many individuals strongly believe these techniques can help regulate moods and improve overall health.