Weekly market insights

Institutional Opinions

1. Economic Growth and Bull Market: The data suggests that the economy continues to exhibit signs of growth, supported by rising productivity and strong performance in the cyclical sector. This trend supports the case for a broader bull market in the financial markets.
2. Labor Market and Inflation: The labor market and inflation remain key factors influencing market movements. Investors are closely monitoring employment and inflation trends, with a preference for rising employment and falling inflation. However, the relationship between these two trends is complex and not mutually exclusive.
3. Productivity and GDP Growth: Rising productivity, as indicated by a 3.5% increase last quarter, can contribute to economic resilience and sustained GDP growth. Stronger productivity, coupled with growth in the labor force, can help the economy weather challenges posed by tighter monetary policy. Moreover, rising productivity may help dampen inflation, particularly in a moderate wage-growth environment.
4. Yield Curve Steepening: The steepening of the yield curve is seen as a positive sign, reflecting the potential for a "soft landing" for the economy. A steepening yield curve suggests a growing economy, rising corporate profits, and an eventual end to the Fed's rate-hiking cycle. While it doesn't rule out the possibility of an economic downturn, it is often associated with the transition from a bear market to a bull market for stocks.
5. Cyclical Sector Outperformance: The outperformance of cyclical investments indicates improving investor sentiment and risk appetite. This trend suggests that equity-market gains are being driven by a positive outlook for economic and corporate-profit growth. While there may be concerns about the economy slowing down in the future, the current performance of cyclical sectors validates the market's overall optimism.
6. Caution for the Future: Despite the positive trends mentioned above, caution is advised for the future. It is acknowledged that the economy may show signs of slowing in the latter part of 2023. This suggests that while market fundamentals appear strong, there could be challenges ahead, and investors should remain vigilant.
7. Preference for Short-Term Bonds: The investment recommendation favors short-term sovereign bonds over long-term bonds. This preference is driven by attractive yields in the short term and concerns about the potential risks associated with holding long-term bonds. Investors are cautioned against overweighting high-quality credit and are advised to consider inflation-linked bonds.
8. Sensitivity to Yields: Market sentiment remains highly sensitive to changes in Treasury yields, particularly the 10-year yield. The recent recovery in U.S. stocks is linked to a decline in these yields from 16-year highs. This suggests that yield movements will continue to influence market sentiment and investment decisions.
9. Demographic Factors: Demographics are becoming a significant factor in economic and investment analysis. Aging populations in developed markets are expected to impact inflation, labor markets, and economic growth. As workforces shrink and wage growth remains high due to labor shortages, inflation may rise, and the rate of sustainable economic growth could be lower.
10. Inflation Expectations: Expectations of inflation settling above central bank targets are driving the preference for short-term bonds. Investors are demanding more compensation for holding long-term bonds due to higher inflation volatility and rising debt levels. Factors like a credit rating downgrade and foreign demand for long-term Treasuries could further affect long-term bond yields.
11. Macro and Market Volatility: The current environment is characterized by greater macro and market volatility. This volatility is influenced by various "mega forces," including aging populations, the low-carbon transition, and geopolitical shifts. Central banks are expected to maintain a tightening bias to control inflation.
12. Investment Themes: The investment outlook is shaped by the view of "full-employment stagnation," where inflation and wage growth are influenced by the resolution of pandemic-related mismatches in the economy. In this context, central banks are likely to keep policy tight to combat inflationary pressures, which may impact overall asset class returns.
13. Security Selection and Expertise: With greater market dispersion and volatility, security selection and expertise become more critical for achieving above-benchmark returns. Opportunities for relative value investing and identifying market mispricings may be more abundant.
14. Mega Forces Impact: Mega forces, including digital disruption, globalization, low-carbon transition, aging populations, and financial system changes, are expected to reshape economies and sectors. These forces are already in play and can create significant shifts in profitability. Identifying beneficiaries and catalysts is crucial for investment strategies.
15. Overweight AI: The report recommends overweighting investments in artificial intelligence (AI) due to its multi-country and multi-sector growth potential. AI applications are expected to disrupt industries, making it a promising investment theme.
16. End of Financial Repression and Low Real Interest Rates: The data suggests that the era of financial repression and low real interest rates is coming to an end. This implies that investors may need to adjust their investment strategies to account for higher interest rates in the future.
17. Growing Government Debt: The Jackson Hole Symposium highlighted concerns about the growing government debt, especially in the United States. This could have implications for fiscal and monetary policy, potentially leading to more inflationary pressures.
18. Market Concentration: While there is concern about market concentration in the S&P 500, the data suggests that other global indexes can be even more concentrated. Investors should be aware of concentration risks when investing overseas.
19. Market Composition: It's not just concentration but also the composition of foreign indexes that investors need to consider. Some foreign indexes may not accurately represent the underlying economy or may be heavily skewed towards specific sectors. This knowledge is crucial for making informed investment decisions.
20. BRICS Expansion: The expansion of BRICS (Brazil, Russia, India, China, and South Africa) with additional members could have some symbolic significance, but the data suggests that achieving a united stance on global issues among such diverse economies may be challenging. G7 countries are likely to retain significant global influence.
21. Investment Implications: Investors should consider adjusting their portfolios to account for the changing interest rate environment, market concentration, and composition of indexes. Actively managed funds that align with a country's competitive strengths may be preferred over passive index funds.
22. Global Economic Landscape: The data reflects a complex and evolving global economic landscape with various challenges and opportunities. Investors should stay informed and adapt their strategies accordingly, taking into account factors like government debt, market concentration, and geopolitical developments.
23. High-Yield Bond Market Resilience: The U.S. high-yield (HY) bond market has shown positive year-to-date returns, driven by a strong U.S. economy and available financial liquidity. The fundamentals for this asset class seem stable, with relatively low distressed ratios and expectations of a decline in default rates by year-end 2024. Therefore, we can predict that the high-yield bond market will likely continue to perform well in the near term, with potential for positive returns.
24. Bifurcation in the HY Sector: There is a growing divide within the high-yield market, with double-B (BB) rated companies showing strength and stability, while lower-rated issuers, especially those rated single-B (B) and below, face challenges, including liquidity issues and potential solvency risks. This suggests that investors should be selective in their high-yield investments and focus on higher-rated issuers to mitigate credit risk.
25. Opportunities in Long-Term Corporate Bonds: Long-term investment-grade (IG) corporate bonds have experienced a significant price decline due to their higher duration. As yields across the maturity spectrum are similar, there may be opportunities for investors to consider longer-term IG bonds with lower prices, potentially leading to near-term price appreciation. This suggests that long-term corporate bonds could be an attractive investment option for investors seeking yield and potential price appreciation.
26. Energy Sector Insights: Q2 earnings for the S&P 500 Energy sector declined year-over-year but remained healthy on an absolute basis. Refining margins have been resilient, and exploration and production (E&P) companies are expecting cost inflation to ease, potentially benefiting from lower operating costs in 2024. Oilfield services companies could grow earnings despite a declining U.S. rig count, driven by factors like industry capacity and international operations. This implies that the energy sector may offer opportunities for investors in the coming quarters.
27. Attractive Entry Points in Secondary Markets: Secondary markets for alternative investments, such as private equity, credit, real estate, and infrastructure, have seen pricing stabilize or decline from their peak levels in recent periods. This could represent an attractive entry point for investors looking to diversify their portfolios and acquire assets at discounts relative to historical levels. Specifically, infrastructure secondaries may offer compelling opportunities for investors seeking stable income, protection against inflation, and favorable risk-adjusted returns.
28. Artificial Intelligence (AI) Overview: The data provides a brief overview of AI, its historical development, and its potential impact on various sectors, including Information Technology. While the focus is on the technology sector, this information underscores the increasing importance of AI across industries. Companies specializing in AI, software, and semiconductors may benefit from the growth of AI applications.
29. Investment Implications: Throughout the data, there are recurring themes of selectivity, active management, and the need for due diligence in investment decisions. These themes suggest that investors should carefully consider their investment choices, favor higher-rated assets when assessing credit risk, and be prepared to actively manage their portfolios to capture opportunities and mitigate risks.
30. United States: The U.S. stock market declined during the week due in part to negative news about Apple and concerns regarding the pricing of the upcoming iPhone 15. Growth stocks outperformed value shares, and large-cap stocks did better than small-caps. Economic data generally surprised on the upside during the week, with strong reports on services sector activity and lower-than-expected jobless claims. Short-term bond yields increased in response to positive jobless claims data. The municipal bond market was influenced by new issuances, which had a dampening effect on the secondary market. In the investment-grade corporate bond market, credit spreads remained resilient despite a significant amount of issuance.
31. Europe: European stock markets, including Germany's DAX and France's CAC 40, experienced declines driven by concerns of elevated interest rates potentially causing an economic slowdown. Economic data in the Eurozone indicated signs of economic weakness, including lower GDP growth and declining retail sales volumes. Bank of England (BoE) Governor Andrew Bailey suggested that the interest rate cycle might be nearing its peak. BoE's August business survey hinted at waning price pressures.
32. Japan: Japanese stock markets showed mixed performance with concerns about China's economic slowdown affecting investor risk appetite. Weak economic data and a downward revision of second-quarter GDP growth contributed to market sentiment. The weakening yen prompted Japanese authorities to issue strong warnings about currency intervention.
33. China: Chinese stock markets declined due to concerns about the country's weakening economic outlook. Economic indicators, such as the Caixin/S&P Global survey of services activity and trade data, indicated challenges in the Chinese economy. The renminbi exchange rate fell to a record low against the U.S. dollar, raising concerns about China's economic prospects and exchange rate stability.
34. Other Key Markets (Turkey and Poland): In Turkey, the government's Medium-Term Programme (MTP) acknowledged slower growth and higher inflation, signaling a potential return to orthodox policies. Poland's central bank surprised investors by cutting its key policy rate, citing a slowdown in economic activity and weaker demand pressure.
35. Continued Shift in Supply Chains: The trend of "nearshoring" and "friendshoring" in manufacturing is likely to continue. Factors such as geopolitical tensions, tariffs, and wage differentials are reshaping global supply chains.
36. Diversification of Trade Partners: The data indicates that the U.S. is diversifying its sources of imports away from China. This trend is expected to persist as U.S. companies seek to reduce their dependence on Chinese manufacturing.
37. Beneficiaries of the Trend: Countries in Latin America and emerging Asia, such as Mexico, India, and Vietnam, are poised to benefit from this trend. They offer lower production costs, integration into global supply chains, and friendly relations with the U.S.
38. Positive Impact on Equity Markets: Mexican equity markets have already seen a boost, and this trend could continue as more manufacturing moves to the region. Investors may consider opportunities in these markets.
39. Government Incentives: Governments in India and possibly other countries may continue to incentivize manufacturing production through measures like tax reductions and infrastructure investments.
40. Uncertainty Remains: While the trend is favorable for certain countries, the future remains uncertain due to various factors, including changing geopolitical dynamics and trade policies.
41. Investor Opportunities: Investors looking to capitalize on this trend may consider diversifying their portfolios by focusing on emerging markets, particularly those countries that stand to benefit from "nearshoring" and "friendshoring."
42. Equity Consolidation: Equities are currently in a consolidation phase following a run-up driven by soft-landing optimism and enthusiasm related to artificial intelligence (AI). The data suggests that this consolidation is likely to continue, and investors should closely monitor price action and incoming economic data.
43. Bifurcated Performance: The performance of equities appears to be divided, with technology-oriented sectors and energy showing momentum, while other sectors experience relative weakness. The narrow technical backdrop suggests that broader market participation may be needed for sustained gains.
44. Economic Uncertainty: There is a tug-of-war between market momentum, supported by a soft-landing narrative, and weak leading economic indicators. The lagged impact of rapid Federal Reserve tightening increases the likelihood of economic contraction, but the timing remains uncertain.
45. Labor Market Influence: The undersupplied labor market is a key factor supporting jobs and consumer spending. While economic weakness may occur eventually, the labor market may need to normalize first. If the Fed successfully controls inflation before economic deterioration, it could support equities despite a weaker economy.
46. Fundamental Trends: Next 12-month S&P 500 earnings estimates are trending upward, which supports equity markets. However, high valuations for the S&P 500 could become a headwind if economic and earnings trends reverse.
47. Market Technicals: Technical analysis suggests that the S&P 500 may face resistance and potentially put in a lower top. Support levels to watch include recent lows at around 4335 and the May breakout level near the 200-day moving average at around 4200.
48. Narrow Market Participation: Market participation remains narrow, with a significant percentage of stocks below their 200-day moving average. This indicates that market performance has been one-sided, dominated by technology, and broader breadth may be needed for a healthy bull market.
49. Sector Insights: Technology, despite valuation concerns, maintains relative strength. Energy has shown improved earnings expectations and relative performance, making it an attractive sector with high free cash flow and a low valuation.
50. Seasonal Equity Weakness: The data suggests that seasonal equity weakness is likely to continue through late Q3. Weekly momentum indicators are currently pointing down, indicating a negative outlook for equities. Support levels to watch are near S&P 4300 and Nasdaq 13,150.
51. Macroeconomic Headwinds: Rising interest rates and the strength of the US dollar are major macroeconomic headwinds for equities in the coming months. Both factors are challenging important technical levels, and their recent uptrends have not shown evidence of reversing. Key resistance levels to watch are 4.3% on the 10-year US Treasury yield and 105.3-105.8 on the US dollar index.
52. Market Cycle: The market cycle that bottomed in Q4 2022 is viewed as intact, but a period of choppy trading is expected. Long-term investors are encouraged to remain patient for better technical entry points moving into Q4.
53. Short-Term Support and Resistance: Key support bands for S&P 500 and Nasdaq are identified, with initial support near S&P 4418-4458 and Nasdaq 13,629. Next key support levels are near the mid-August lows at S&P 4335-4302 and Nasdaq 13,123. While a trading bounce could occur, equities are expected to remain range-bound and volatile through September.
54. Energy Sector: The energy complex, including WTI Oil and the S&P 500 Exploration and Production (E&P) Index, continues to trend higher after bottoming in March-June 2023. WTI Oil has broken key resistance levels, and the energy sector is viewed as a useful hedge against inflation concerns and a means to diversify equity exposure. While a short-term pause or pullback is likely, further upside in the energy complex is expected into 2024.
55. Competing Alternatives to Equities: Historically, the popularity of stocks over other asset classes was attributed to the "There Is No Alternative" (TINA) phenomenon. However, with the Federal Reserve aggressively hiking interest rates and bond yields surging, there are now compelling alternatives to equities. This shift could impact the equity market.
56. Rise in Bond Yields: Bond yields have risen significantly, with short-term Treasuries offering yields close to or above five percent and investment-grade corporate bonds yielding even higher. This creates competition for equities as investors seek higher yields and returns from bonds.
57. Widening Gap Between Bond and Equity Yields: The gap between the 10-year Treasury yield and the S&P 500 dividend yield has widened to levels not seen in the past 10 years. This significant spread suggests that bonds are becoming more attractive compared to equities from a yield perspective.
58. Potential Shift in Investment Preferences: If bond yields remain elevated and surpass the dividend yields offered by equities, investors may be inclined to allocate a larger portion of their capital to bonds instead of equities. This shift in preference could serve as a headwind for the U.S. equity market if it persists.
59. Historical Performance Trends: Historical data indicates that S&P 500 returns have been highest when the spread between its dividend yield and the 10-year Treasury yield was the widest. Conversely, returns were lower when the dividend yield was below the 10-year yield. Currently, the spread is negative, suggesting potential headwinds for equities.
60. Impact of Rising Oil Prices: Rising oil prices are noted as a potential threat to inflation progress in the coming months. Higher energy costs could lead to upward pressure on headline inflation, potentially influencing the Federal Reserve's monetary policy decisions.
61. Global Economic Trends: Economic data from various regions, such as Germany's industrial production decline, highlights economic challenges and potential softening. These global economic trends can have implications for equity markets.
62. Impact of Chinese Policies: Chinese policymakers have introduced stimulus policies, particularly targeting the real estate sector. These measures could have a significant impact on China's economy and may influence global markets.
63. Technological Developments in China: The launch of Huawei's new smartphones using domestically manufactured chips indicates China's ability to overcome U.S. technology restrictions. This development could have positive implications for Chinese equities and technological innovation.

Previous update:

1. Labor Market Softening: The data and trends suggest that there are early signs of softening in the U.S. labor market. This includes a decrease in job openings, a slowdown in wage growth, and an increase in the unemployment rate. These factors collectively indicate that the labor market may be cooling down.
2. Federal Reserve's Response: The Federal Reserve is likely to view the softening labor market as a reason to keep interest rates on pause. The Fed has been targeting slower wage gains, and a cooling job market aligns with their goals. This suggests that the Fed may delay further rate hikes and may even consider rate cuts if economic conditions worsen significantly.
3. Treasury Yields: The softening labor market may cap upside potential for Treasury yields in the near term. Lower economic growth and easing inflationary pressure, as indicated by slowing wage growth, could keep a lid on yields. Investors may see government bonds as a more attractive option in such an environment.
4. Financial Markets: A gradual cooling of the labor market, assuming it doesn't lead to a deep or prolonged downturn, could create a better backdrop for financial markets. If the Fed pauses its rate-hiking cycle, it is generally positive for both equity and bond markets over time. This could lead to improved performance in these markets heading into year-end.
5. Consumer Behavior: A softer labor market may lead to lower consumer confidence and reduced consumption patterns over time. When job openings decrease and workers are less inclined to quit their current jobs due to concerns about finding new employment, it can impact household spending and economic growth.
6. Market Volatility: While the gradually cooling jobs market may offer support to equity and bond markets in the long run, some volatility may persist, especially through historically volatile months like September and October. Investors may remain cautious and vigilant in response to economic uncertainties.
7. Inflation Outlook: Slower wage gains and easing wage growth could support the moderation of inflation, especially core inflation. This aligns with the Fed's goals and could further justify their decision to pause rate hikes.
8. Fed's "Goldilocks" Scenario: The Fed may view a cooler labor market as a "goldilocks" scenario – not too hot, but not too cold either. This scenario, where the labor market cools but remains relatively healthy, could be what the Fed aims to achieve.
9. Market Expectations: Market participants are pricing in a pause in the Fed's rate-hiking cycle, and the possibility of rate cuts is being pushed further into the future. This suggests that investors anticipate the Fed's cautious approach to monetary policy in response to economic conditions.
10. Shift to Higher Inflation: The data suggest a shift toward higher inflation, as indicated by changes in the Federal Reserve's policy stance. This shift is expected to persist in the decade ahead, with nominal GDP growth and inflation likely averaging higher than in the decade before the pandemic.
11. Impact on Interest Rates: The shift to higher inflation is likely to result in a higher U.S. interest rate structure. This suggests that interest rates may continue to rise, which could have implications for borrowing costs and investment decisions.
12. Market Volatility: The recent market performance, with U.S. equities experiencing a significant monthly decline and a sharp rise in longer-term U.S. Treasury yields, indicates increased market volatility. Investors should be prepared for fluctuations in asset prices and potential shifts in market sentiment.
13. Subsidies and Government Intervention: The data highlight a global trend of increased government intervention and subsidies, particularly in China and the United States. This trend could impact global investment and trade flows, disrupt supply chains, and affect profit margins.
14. Impact on Specific Sectors: The bull market in global subsidies may lead to oversupply in sectors such as semiconductors, electrical vehicles, and renewable energy products. This oversupply could result in economic inefficiencies and lower profit margins for companies in these sectors.
15. Portfolio Considerations: Given the uncertain market conditions and potential for continued volatility, a balanced approach to portfolio construction is recommended. Investors should consider diversifying across asset classes and maintaining a neutral stance on both stocks and bonds. This approach allows flexibility to adjust portfolios based on changing market conditions.
16. Earnings Outlook: Corporate earnings will be a crucial variable in determining market direction. If investors believe that most of the earnings pressure has already been felt, the market may return to an upward trend. However, uncertainty about corporate earnings, along with other factors like economic concerns and geopolitical issues, could lead to further market volatility.
17. Interest Rate Risks: Bond yields are still in a peaking process, and the effect of recent rate hikes may take time to filter through to the economy and markets. This suggests that interest rate risks remain two-sided, and investors should closely monitor rate developments.
18. Cash Holdings vs. Market: With cash yields rising and inflation cooling, investors may be tempted to increase cash holdings to benefit from higher yields and reduce portfolio volatility. However, the data suggests that holding excessive cash for an extended period may lead to missed opportunities for better returns in other growth assets. Over the long term, cash is likely to underperform other growth assets, potentially dragging down portfolio performance.
19. Diversification Importance: Diversification across asset classes and strategies is highlighted as an effective way to capture upside-return potential while managing portfolio volatility. The historical performance data suggests that even conservative allocations, such as Moderate Income, have outperformed cash over extended periods. Diversification can help investors navigate market fluctuations and achieve better risk-adjusted returns.
20. Earnings Season: The data on second-quarter earnings indicates that overall profits for the S&P 500 Index contracted for the third consecutive quarter, with earnings declining between 5% and 6%. This suggests a challenging earnings environment, with revenue growth also modest. Investors should be cautious about earnings expectations and focus on quality investments, particularly in the U.S. Large Cap equities segment.
21. High-Yield Bonds: The high-yield bond market is showing resilience, with credit spreads remaining below historical averages. While some weakness is observed in the lowest credit quality segments, overall stress in the high-yield sector appears limited. However, it's expected that credit spreads may rise as the economy weakens, impacting the market value of high-yield securities. Investors are advised to consider moving up in credit quality and avoiding lower-quality issuers.
22. Silver vs. Gold: Silver and gold prices historically tend to mirror each other, but silver prices are more volatile due to significant industrial uses. Both metals are influenced by factors like changes in monetary policy, real interest rates, and the value of the U.S. dollar. Recent weakness in silver prices is seen as an attractive opportunity for long-term investors looking to diversify their portfolios with precious metals.
23. Diversification in Private Markets: Diversification across various private market strategies is emphasized as a means to achieve greater portfolio diversification and reduce risk. Different alternative sub-categories can have varying performance experiences, depending on economic cycles. A well-diversified portfolio that includes a range of private capital strategies can provide a more stable return experience over time.
24. BRICS Expansion: The expansion of the BRICS group to include new members, such as Saudi Arabia, the United Arab Emirates, Iran, Egypt, Ethiopia, and Argentina, signifies a significant shift in geopolitical and geo-economic dynamics. This expansion reflects waning U.S. influence in some regions, with Middle Eastern countries looking to diversify their partnerships beyond the West. The move also sends a message to Western powers about the negative consequences of unilateral economic sanctions.
25. China-India Relations: The recent agreement between China and India to resolve their longstanding Himalayan border disputes suggests the potential for improved relations between the two countries. This development is significant geopolitically and geo-economically, as both China and India are major global players with substantial economic ties.
26. BRICS and Developing Countries: BRICS and similar groupings, like the Shanghai Cooperation Organisation (SCO), are seen as more consensus-driven and flexible compared to Western-led international institutions. This appeals to developing countries looking to assert their sovereignty while benefiting from economic, trade, and geopolitical advantages. Many countries seek to emulate India's balanced approach to foreign and economic policy.
27. U.S. Labor Market: The data indicates a decline in job openings and a drop in the quits rate in the U.S., suggesting that demand for workers is cooling. This could lead to a more balanced labor market and temper wage growth. Policymakers may view these conditions as favorable for achieving an economic soft landing and avoiding a spike in unemployment.
28. Consumer Confidence: Despite a drop in consumer confidence due to factors like higher borrowing costs and elevated prices, expectations for a recession in the next 12 months have decreased. This may reflect optimism that the Federal Reserve will not aggressively raise interest rates, instead allowing restrictive monetary policy to manage inflation and wage growth.
29. Canadian Monetary Policy: The Bank of Canada's decision to pause its policy rate hikes following earlier increases indicates a shift in monetary policy. The expectation of slower economic growth, especially in household consumption and the real estate sector, may support the case for a policy hold at the current rate. This aligns with market expectations.
30. German Economic Challenges: Germany's economy, once an export powerhouse, is facing challenges due to structural issues, including underinvestment in infrastructure and R&D, dependence on China, an aging population, and bureaucracy. The government's measures to support energy efficiency and R&D investment, along with commitments to finance the green transition, reflect efforts to address these issues.
31. Renewable Energy Challenges: Challenges facing offshore wind companies, such as higher costs of capital and supply chain disruptions, have led to anticipated impairments in the renewable energy sector. These challenges can impact the share prices of renewable-focused companies and underscore the complexities of transitioning to cleaner energy sources.
32. Asian Economic Developments: In Asia, China is taking steps to support its economy through policy initiatives, including government spending and tax incentives. Earnings season results from various companies in the region show a mix of revenue growth and challenges, reflecting ongoing economic dynamics. Market Trends and Fed Policy: The market is currently experiencing a relief rally following its first drawdown. Fed Chair Powell's comments about being "prepared to raise rates further if appropriate" but proceeding carefully indicate that the market is highly influenced by incoming economic data and Fed expectations. This suggests that future market movements will be closely tied to economic indicators.
33. Soft Landing Scenario: The soft landing narrative is gaining traction as inflation and employment appear to be normalizing as a result of Fed actions. The decline in job openings and quits rate is seen as positive for the Fed's goal of conquering inflation without significant job loss. However, there are still questions about whether job market normalization could eventually lead to job loss.
34. Economic Indicators and Recession: Economic indicators like jobless claims, the August jobs report, and ISM surveys will be closely watched by investors. The lag effect of rapid Fed tightening and yield curve inversion suggests the possibility of a mild recession in the future. The timing and degree of economic weakness will be critical factors in market trends.
35. Nominal GDP vs. Fed Funds Rate: Historical data suggests that when the Fed funds rate surpasses nominal GDP, a recession often follows. The recent positioning of the fed funds rate above nominal GDP raises concerns about a potential recession. However, timing is crucial, and the impact of previous economic stimulus could delay the onset of a recession.
36. Earnings Estimates and Market Volatility: Quarterly earnings estimates have been increasing, particularly in sectors like Technology, Communication Services, and Consumer Discretionary. These positive earnings trends support equity market performance. However, there are concerns that earnings estimates may be too high, increasing the likelihood of market volatility coinciding with economic volatility.
37. Technical Analysis: Technical analysis suggests that there is still room for the market rally to extend further. Overbought conditions may lead to price action assessment at resistance levels, such as the S&P 500 high of around 4600. A failure at these levels could indicate a downtrend, with technical support around 4335 and 4200.
38. Narrow Market Participation: Market participation has been narrow, with Tech stocks dominating performance. Broader market participation is desired for a healthy bull market. Technology earnings trends continue to support this sector's outperformance.
39. Defensive Sectors: Defensive sectors like Utilities and Consumer Staples have not seen improved relative strength despite increased volatility. These sectors may not be attractive to investors during the current market conditions focused on growth and tech stocks. Resilient Economic Activity: Despite expectations of a slowdown in U.S. economic activity, particularly in capital spending, the economy has remained resilient. Real nonresidential fixed investment grew by 4.6% year-over-year in the second quarter.
40. Drivers of Capital Spending: The growth in capital spending is attributed to spending on structures and intellectual property. While the office sector faces high vacancies and manufacturing activity has softened, other factors like the AI boom, fiscal policy incentives, and demand for warehouses and green buildings are driving intellectual property and structures investment.
41. Shift towards Intellectual Property: Capital spending is shifting towards intellectual property spending, which is less sensitive to interest rates than physical investment spending. Intellectual property investment has become the largest percentage share of GDP among all nonresidential fixed investment components, accounting for 5.5% of GDP.
42. Investor Implications: The shift towards intellectual property spending suggests that the economy is becoming less sensitive to interest rates. This could be beneficial for equity markets. As long as businesses continue to increase investments in intellectual property, the economy may maintain its momentum.
43. Economic Momentum: Despite some declines in manufacturing and services indicators, the overall economic momentum seems to be intact. As long as businesses continue to invest in intellectual property, this trend may continue, potentially benefiting equity markets. U.S. Market: The easing of inflation fears has provided a boost to the stock market. Investors seem to view bad news for the economy (such as slowing job openings and the rising unemployment rate) as positive for stock prices due to the implications for interest rates. The decrease in longer-term interest rates during the week has benefited growth stocks, as it reduces the implied discount on future earnings. The bond market appears relatively quiet, with no primary issues in the corporate bond markets and light trading activity. The increase in the unemployment rate to a 17-month high suggests a potential softening in the labor market. However, the labor force participation rate also increased, indicating more people re-entered the job market. Atlanta Federal Reserve Bank President Raphael Bostic's comments about appropriate interest rates and inflation have raised hopes that the Fed may not raise rates further this year. The market is increasingly pricing in the possibility that the Fed will remain on hold for the rest of the year.
44. European Market: In the Eurozone, the annual inflation rate remains high at 5.3%, slightly exceeding expectations. Core inflation, which excludes volatile food and energy costs, has slowed but remains elevated. Minutes from the ECB's July meeting suggest that a soft landing for the eurozone economy might be possible. A strong labor market in the region is noted. Inflation in Germany has moderated slightly, and retail sales have declined. These factors could have implications for the overall eurozone economy.
45. Japan Market: Japan's central bank is closely monitoring its bond market, with concerns about rising yields. The yen's historic weakness is prompting speculation about potential intervention in foreign exchange markets. Japan's unemployment rate unexpectedly rose, and capital expenditures growth slowed, possibly influenced by concerns about a global economic slowdown, especially in China.
46. China Market: Chinese stocks have risen following government stimulus measures aimed at reviving the economy. These measures include reducing foreign currency reserve requirements and encouraging lower mortgage rates for homebuyers. The real estate sector's problems, including defaults by major developers like Country Garden Holdings and China Evergrande Group, have raised concerns about potential spillovers to other parts of the financial system. China is facing below-trend growth, with quarter-on-quarter economic growth at just 0.8% as of June. Trade activity is also coming off cyclical highs.
47. Other Key Markets (Turkey and Brazil): Turkiye's central bank implemented a significant interest rate increase to combat inflation. The move is seen as a step toward more orthodox monetary policy. Brazil's 2024 budget projection includes a 0% primary deficit but may require new revenues of about 1.5% of GDP. The government plans to increase revenue through tax enforcement, but further measures might be needed.

Previous update:

Institutional Opinions:

1. Federal Reserve Policy and Interest Rates: The Federal Reserve is adopting a more balanced approach to its rate hikes, suggesting that policy rates might be approaching a peak. The Fed is resolute in combating inflation and is likely to maintain high interest rates until inflation aligns with the 2% target. While the Fed could continue raising rates if necessary, it's becoming more cautious about potential over-tightening, given the ongoing economic resilience.
2. Economic Growth: Despite initial expectations, economic growth has proven more robust, consistently surpassing forecasts. However, risks to growth persist—credit conditions are tightening, job gains are slowing, and the impact of prior rate hikes is still rippling through the economy. Positive economic momentum is expected to continue, with growth estimates being revised upward. The Atlanta Fed's real-time GDP forecast indicates strong growth.
3. Inflation: Headline inflation has significantly decreased from its peak, and various categories are experiencing slower price increases. Core inflation remains elevated, motivating the Fed to work toward its 2% target, possibly maintaining a somewhat hawkish stance. Achieving the final stretch of the 2% target ("last mile" of inflation) could be challenging and might necessitate further adjustments in the labor market.
4. Financial Markets: Financial markets are increasingly confident in the Fed's ability to achieve a "soft landing," with stocks displaying resilience and a likelihood of sustained positive trends. Bonds are facing pressure due to rising yields, though the higher-interest-rate element could mitigate price declines. Equity market valuations may not expand significantly without a potential Fed shift to rate cuts, implying slower gains. Historical patterns suggest heightened volatility in September and October, followed by equity rebounds, underscoring the importance of patience and investment discipline.
5. Investor Recommendations: Investors are advised to consider a dollar-cost averaging strategy to capitalize on potential market volatility. Opportunities exist in undervalued segments of the equity market. In the fixed-income realm, positioning for potentially lower yields next year by balancing cash-like investments with longer-term bonds could be advantageous.
6. Macro Strategy and Interest Rates: The recent rise in global long-term and real interest rates reflects the struggle of developed economies to finance post-pandemic deficit policies. In the U.S., concerns arise about the sustainability of increased government debt amidst monetary policies aimed at addressing an overheated labor market.
7. Market View and Economic Outlook: Both the market and BoA Global Research are growing more comfortable with the idea of a soft landing in 2024. Expectations include the peaking of short-term rates and anticipation of rate cuts by the Federal Reserve in 2024. Investors are encouraged to extend duration in Fixed Income portfolios due to attractive real and nominal rates during this phase of the interest rate cycle.
8. Housing Market and Mortgage Rates: The housing market is experiencing a dearth of property turnover, with only 1% of U.S. homes changing ownership in the current year. This trend is driven by homeowners holding on to rock-bottom mortgage rates below current levels. Mortgage rates as low as 3% are attributed to pandemic-related distortions, with historical averages much higher.
9. Investment Implications: August is expected to bring some softness, providing an opportunity for long-term growth investors to rebalance portfolios. The advice is to maintain a neutral stance across Equities and Fixed Income due to the mixed economic environment even in the soft landing scenario. Favoring high-quality companies with stable cash flows is recommended, particularly those poised to withstand prolonged slow growth.
10. Fed Policy and Rate Cycles: The recent increase in real interest rates could be linked to the Federal Reserve's more lenient approach to inflation and the mounting interest expenses of government debt. There's potential for longer-term issues if rates remain elevated due to escalating deficits. The Fed's inclination to let inflation exceed its target implies the possibility of continued bear-steepening.
11. Housing Affordability and Home Equity: A sluggish housing market with minimal turnover is attributed to homeowners benefiting from mortgage rates significantly lower than prevailing levels. Low supply, rising prices, and increased financing costs have led to reduced housing affordability. Despite challenges, households possess substantial home equity, which could serve as support for future financial needs.
12. Shift in Retirement Portfolio Allocation: U.S. retirees are increasingly allocating a larger portion of their savings to equities, a trend seen over the past decade. More than 70% of portfolios for over-55 actively managed 401(k) investors are in stocks, compared to 38% in 2011. Similar patterns are observed among investors aged 65-69 and even those 85 or older.
13. Factors Driving Equity Allocation: The surge in equity allocation among retirees can be attributed to several factors. Historically, stocks have outperformed bonds in terms of returns, a trend that could continue, especially with elevated inflation post-pandemic. The tendency to "buy on dips" due to rapid equity market rebounds supports higher equity exposure.
14. Federal Reserve Influence and Confidence: The Federal Reserve's history of intervening during financial crises has instilled confidence in investors that markets will rebound, reinforcing their willingness to allocate more to stocks. The concept of a "Fed put" has evolved, with investors less concerned about market crashes and more confident in eventual recoveries.
15. Generational Influence and Risk Tolerance: The majority of retirees are from the baby boomer generation, which tends to exhibit greater risk tolerance due to not experiencing major financial downturns in their active investing years. Longer life expectancies also encourage greater equity exposure in retirement portfolios.
16. Risks of Higher Equity Exposure: While higher equity exposure can lead to potential gains, it also comes with risks. Retirees might be forced to sell stocks at discounted prices during market downturns, impacting their retirement funds. Additionally, increasing healthcare costs and uncertainties around future fiscal spending policies could affect retirees' financial stability.
17. Impact on Investment Strategy: The trend of higher risk tolerance among retirees may lead to increased portfolio rebalancing during market volatility, aiming to buy stocks at more attractive prices. However, uncertainties around fiscal policies and the competition from higher bond yields could impact the effectiveness of the "buy on the dip" strategy. As a result, aligning asset allocation with risk tolerance and time horizon is advisable.
18. Market Pullback and Seasonality: Equity markets, including the S&P 500, Equal-Weighted S&P 500, Nasdaq Composite, and Russell 2000, have experienced a pullback with negative returns since the beginning of August. This period aligns with historical seasonality trends, as August to October is historically a softer period for the markets.
19. Factors Influencing Market Moderation: The current moderation in market momentum is attributed to higher bond yields and oil prices. The US 10-year Treasury yield and 2-year yield have reached significant highs, impacting investor expectations. Rising WTI crude oil prices are also contributing to increased costs, potentially slowing economic growth.
20. Economic Weakness in China and Europe: Weaker economic activity in China and Europe is adding headwinds to market moderation. Economic indicators, particularly PMI services, are signaling contraction in these regions. The potential impact of tighter lending and high interest rates on consumers is a concern.
21. Earnings Trends and Economic Outlook: Earnings trends from Q2 retail earnings suggest a bend-but-not-break pattern in consumer spending and economic activity. Back-to-school spending provides hope for the latter half of 2023, but challenges like higher credit card delinquencies and inventory shrinkage are also observed.
22. Technical Outlook and Support Levels: The prevailing trend, prior to recent volatility, is expected to hold. The current pullback is seen as a healthy consolidation, allowing fundamentals to catch up with price. Key support levels for the S&P 500 are identified around 4200-4328, reflecting a typical drawdown from peak levels.
23. Equal-Weighted S&P 500 Support and Participation: The Equal-Weighted S&P 500 and Small Caps are testing potential support at their 200-day moving averages. The short-term movement and oversold relief rally at these levels will provide insights into future trends. Increasing participation beyond the Tech sector is crucial for a healthy bull market.
24. Influence of Oil and Interest Rates: The increase in US Treasury yields and WTI crude oil prices is impacting economic growth and investor sentiment. Higher interest rates and energy costs act as headwinds to the bullish, soft-landing narrative. Monitoring the interactions between oil prices, interest rates, inflation, and Fed policy is essential for short-term market movements.
25. Incoming Data and Economic Expectations: Upcoming data releases, including AI-related semiconductor earnings and Fed comments at the Jackson Hole Economic Symposium, will shape economic expectations and market trends. Employment figures, such as JOLTS Job Openings and the August Jobs report, will also play a significant role.
26. Long-Term Economic Impact of Central Bank Tightening: The effects of rapid central bank tightening are anticipated to have a lagged impact on the economy, potentially acting as a drag on economic outlook. While excess savings and fiscal stimulus have supported growth, concerns about central bank actions influencing economic trends remain.
27. Continued Monitoring and Caution: Given the complexities of market dynamics, potential economic volatility, and the possibility of earnings estimates being too high, investors are advised to continue monitoring data and trends. The current situation calls for caution, adaptive strategies, and an awareness of potential drawdowns and market waves.
28. Mixed Signals Impact Benchmark Returns: The U.S. stock market ended the week with mixed returns due to investors reacting to conflicting signals about the economy and monetary policy. Growth stocks outperformed value shares, with a strong performance from AI chipmaker NVIDIA. However, the downgrade of credit ratings for regional banks and cautious reports from several retailers contributed to the mixed sentiment.
29. Consumer Caution in the U.S.: The Q2 earnings reports from retailers like Macy's and Nordstrom pointed towards growing consumer caution. Macy's reported falling earnings and warned of consumer caution and rising credit card delinquencies. Nordstrom, while beating earnings estimates, expressed concerns about late payments on its credit cards. Other retailers like Dollar Tree and Dick's Sporting Goods noted earnings impact due to store theft.
30. Consumer Sentiment and Labor Market: The University of Michigan's consumer sentiment index for August indicated a slight dip from July's high, potentially due to increased inflation expectations. However, strong income expectations and low jobless claims suggest ongoing labor market health, although wage growth might have slowed due to higher rates.
31. Mixed Business Activity and Economic Outlook: Durable goods orders data hinted at business caution, with fluctuations in orders indicating mixed economic conditions. Manufacturing activity, as indicated by PMI, contracted slightly, affecting business investment outlook. The housing sector, however, appeared resilient, with new home sales reaching a high despite high mortgage rates.
32. Federal Reserve Chair's Interpretation: Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Economic Symposium provided insights into his interpretation of mixed signals. He noted that higher rates impacted industrial production and wages, while the housing sector was showing signs of recovery. The economy's trajectory appeared uncertain due to various factors.
33. Equity and Bond Market Fluctuations: Both stock benchmarks and bond yields experienced fluctuations post-Powell's speech. The 10-year U.S. Treasury yield initially reached 15-year highs but retreated slightly by the end of the week. The bond market exhibited mixed performance, with investment-grade corporate bonds and high yield markets seeing limited activity.
34. European Market Performance: European markets ended the week with gains, as declining natural gas prices and prospects of peak interest rates contributed to positive sentiment. However, weaker economic data prompted markets to lower expectations for future interest rate increases.
35. Eurozone Business Activity and German Economy: Eurozone business activity indicated a contraction for a third consecutive month, suggesting economic challenges. The German economy was predicted to stagnate in Q3 due to weak foreign demand impacting industrial production. Business confidence in Germany also declined.
36. UK Business Activity and Japanese Equities: UK business activity contracted, indicating potential economic challenges. In Japan, equities rallied initially due to positive data announcements but faltered towards the end of the week due to concerns about China's slowdown and trade relations. The yen continued to weaken against the U.S. dollar.
37. China's Economic Challenges and Policy Measures: Chinese stocks declined as negative economic data and deflation signs raised concerns about the country's economic outlook. Erosion of confidence in China's economy led to capital outflows and worries about accelerated outflows. China's government proposed measures to support the property sector and mitigate challenges in the property and trust sectors.
38. Turkey's Policy Measures: Turkey's central bank announced measures to address unsustainable accumulation of FX-protected deposits. These measures aim to reduce costs associated with FX fluctuations and could lead to increased regulation and a shift in deposit behavior.
39. Brazil's Fiscal Rules: Brazil's lower chamber voted in favor of new fiscal rules to manage government spending and debt growth. These rules aim to limit spending growth in relation to revenue increases and inflation, with potential implications for Brazil's fiscal management.
40. Economic Growth and Resiliency: Despite initial forecasts of a recession, recent data indicates a reacceleration of economic growth. The Atlanta Fed's GDPNow model estimates a 5.8% annualized growth rate for the current quarter. This would mark the fifth consecutive quarter of growth at or above trend, highlighting the economy's resiliency even with tighter monetary policy.
41. Retail Sales and Industrial Production: Retail sales exceeded expectations, with a 0.7% month-over-month (m/m) gain and a 1.0% increase excluding autos. Online sales contributed significantly to the increase. Industrial production also showed strength, rising by 1.0% m/m due to robust auto production and high demand for cooling amid sweltering temperatures.
42. Housing Market Stabilization: The housing market displayed signs of stabilization as housing starts and permits increased by 3.9% and 0.1%, respectively. Single-family gains outweighed multi-family declines in both measures.
43. Model Estimates and Potential Overestimation: While the 5.8% growth estimate is strong, it's not guaranteed. Historical data shows that the GDPNow model has, on average, overestimated the final GDP print by 0.8% at this point in previous quarters, and by 2.2% when the model was above 4%. This suggests that caution should be exercised regarding the accuracy of the growth estimate.
44. Recession Avoidance and Yield Impact: Strong economic momentum indicates a likelihood of avoiding a recession in 2023. This momentum has contributed to higher yields. However, risks remain for 2024. The sustainability of robust growth will be key in determining whether yields have reached their peak. With the 10-year yield at 15-year highs, investors might consider adding duration to their portfolios to benefit from attractive income and prepare for eventual lower yields.
45. Equity Market and Interest Rate Outlook: Equities are currently oversold and experiencing a short-term rebound, which is supported by the recent pullback in interest rates. The focus remains on rising interest rates, with the US 10-year yield testing a critical technical range of 4.24-4.33%. The pullback to 4.20% is seen as a positive development for the ongoing short-term equity market rebound. Investors are closely monitoring the technical levels for the US 10-year yield between 4.33% on the upside and 4.0% on the downside, with anticipation of Jerome Powell's comments at the Jackson Hole Economic Symposium as a directional catalyst.
46. Rate Expectations and Equities: The expectation is for interest rates to stall around current levels, despite the consensus and hedge fund positioning that suggest higher rates. The key downside level is projected to be between 4.0-4.09%. However, the possibility of a breakout above 4.33% is highlighted as a significant technical event that could lead to further upside, potentially reaching 5%. Such a move would pose challenges for equities, particularly growth stocks with higher multiples.
47. Equity Market Short-Term Rebound: The equity markets are undergoing a short-term oversold rebound, with support near S&P 4300 and Nasdaq 13,150. While this bounce is taking place, Q3 is expected to remain volatile due to weak seasonality and the current technical backdrop of the S&P 500 and interest rates. Negative weekly momentum indicators signal the potential for choppy trading through Q3, even as the market attempts to rebound from support levels.
48. Semiconductor Bellwether and Market Reaction: The performance of the SOX Semiconductor index will be crucial to monitor as key semiconductor companies report earnings. Short-term indicators for the SOX are oversold and starting to show signs of bottoming and turning up following a pullback to uptrend support around 3400. Resistance levels are identified at 3662 and a range between 3875-4068, near Q1 2022 highs. The 2023 uptrend lines are considered significant levels for managing downside risk.
49. Uncertainties: While the possibility of a "soft landing" for the U.S. economy is conceivable, certain uncertainties still pose risks: Upside risks to inflation warrant monitoring, even though price pressures have subsided. Various measures of worker compensation growth appear higher than what's consistent with expectations of inflation returning to the Fed’s two percent target over the medium term. Core CPI (excluding food and energy) remained at 4.7 percent y/y in July. The delayed effects tied to monetary policy adjustments need consideration. The persistent economic strength might lead to the view that the U.S. economy is immune to higher interest rates. However, a more plausible explanation is the lag for monetary policy impacts to be felt. Each rate hike can deliver headwinds to economic activity lasting about 2.5 years. The potential for monetary policy to remain restrictive for an extended period or become even more so, coupled with onerous bank lending standards, could increase economic vulnerability to higher borrowing costs and impact corporate earnings.
50. Tailwinds: Despite a steep rise in interest rates across many countries over the past year, global growth has maintained an upward trajectory. As the largest economy in the world, the U.S. continues to display resilience. Projections from the Federal Reserve Bank of Atlanta’s GDPNow model suggest U.S. real GDP could expand by over five percent in Q3. Should this forecast hold true, U.S. economic growth would more than double its Q2 rate, marking the fastest pace since Q4 2021. While we think this forecast will almost certainly be revised lower as the quarter progresses, the recent trend of economic data surprising on the upside paints a picture of an economy running stronger than expected. In our view, the following constructive factors that have been propelling the U.S. economy could help extend the growth runway in the near term: Disinflation is well underway, with the U.S. Consumer Price Index (CPI) falling to 3.3 percent in July from a peak of 9.1 percent year-over-year (y/y) in June 2022. This trend is expected to continue, driven by lower energy and goods prices, along with anticipated easing of shelter inflation. U.S. households remain in good shape, with deployable savings and strong labor demand continuing to boost income gains. Despite a slowdown in hiring pace, the low unemployment rate, ample job openings, and positive inflation-adjusted pay increases indicate a favorable environment. Corporate fundamentals show resilience. The Q2 earnings season featured above-average beat rates relative to consensus profit estimates, solid margins, and stable guidance. These trends reflect companies' ability to manage operating costs and defend margins without resorting to widespread layoffs.
51. Uncertainties: While the possibility of a "soft landing" for the U.S. economy is conceivable, certain uncertainties still pose risks: Upside risks to inflation warrant monitoring, even though price pressures have subsided. Various measures of worker compensation growth appear higher than what's consistent with expectations of inflation returning to the Fed’s two percent target over the medium term. Core CPI (excluding food and energy) remained at 4.7 percent y/y in July. The delayed effects tied to monetary policy adjustments need consideration. The persistent economic strength might lead to the view that the U.S. economy is immune to higher interest rates. However, a more plausible explanation is the lag for monetary policy impacts to be felt. Each rate hike can deliver headwinds to economic activity lasting about 2.5 years. The potential for monetary policy to remain restrictive for an extended period or become even more so, coupled with onerous bank lending standards, could increase economic vulnerability to higher borrowing costs and impact corporate earnings.
52. Putting it all together: Global equities have yielded strong returns this year, boosted by robust U.S. data that dispelled concerns of a significant growth slowdown in 2023. Lower inflation and sustained labor market strength have driven markets to embrace the likelihood of a benign "soft landing" as the most probable outcome for the economy in the coming quarters. This optimistic economic view has translated into the stock market through valuation multiples rebounding and earnings estimates stabilizing. In the fixed income markets, reduced compensation for credit risk is reflected in narrower credit spreads. Although higher base interest rates persist, they help maintain attractive all-in yields. In summary, a moderately defensive stance in portfolios, emphasizing relative value, remains prudent given the U.S. economy's positioning in the later stages of the business cycle.
53. UNITED STATES: Rising prices of 10-year U.S. government bonds this week briefly pushed yields to their highest level since 2007. This move followed stronger-than-expected economic reports, comments from Federal Reserve speakers on higher interest rates to combat inflation, and increased bond auction sizes. The resulting yield increase was likely amplified by thin August trading conditions. Recent data indicating slowing manufacturing activity and weaker-than-expected growth in services have eased selling pressure on bonds. The upcoming speech by Fed Chair Jerome Powell at the Jackson Hole monetary policy conference is anticipated to attract investor interest. This year's symposium, focused on "Structural Shifts in the Global Economy," may provide insights into short-term policy decisions, although Powell might emphasize the Fed's data-dependency and commitment to price stability. Interest rate futures pricing reflects relatively low odds of significant future Fed rate hikes, with around a 50% chance of an additional hike in this cycle, based on recent closing levels. Changes in prices have highlighted shifts in when and how quickly the central bank will look to reduce restrictive policy. The potential for delayed rate cuts, rather than further hikes, is now more prominent. The possibility of rates above 5% through at least June 2024 and an expected year-end 2024 level closer to 4.2% has gained traction.
54. CANADA: Global crude oil prices have rallied, rising approximately 18% above year-to-date lows. This increase coincides with higher global refinery runs and an incremental 2.2 million barrels per day increase in economic activity compared to the previous year. Despite this, major regions such as the U.S., Europe, and China have not experienced inventory builds, indicating a supply-demand mismatch. Refined product demand is expected to remain healthy, keeping the physical market tight. As a result, WTI prices are anticipated to trade around US$80 per barrel unless new catalysts emerge. This positive backdrop supports energy producers in generating cash flow, reducing debt, and returning capital to shareholders. The Canadian economy remains robust, with resilient household consumption trends and improved housing activity, despite the impact of higher borrowing rates. However, concerns persist over the leveraged position of Canadian households, particularly if labor market weakness materializes, making household debt harder to service and potentially affecting economic activity.
55. EUROPE: Economic activity in the eurozone has declined, with the preliminary Eurozone Purchasing Managers’ Index (PMI) falling to 47 in August from 48.6 in July. This reading, significantly below expectations, indicates contraction. The services sector, which had previously been in the expansion zone, also experienced a meaningful decline into contraction territory. The weaker-than-expected data increases the likelihood of a European Central Bank (ECB) pause in its upcoming September meeting. However, rising input cost inflation due to wage pressures is a concern that could prompt further tightening, potentially beyond the current 3.75% level. Rising 10-year nominal Bund yields driven by inflation expectations raise concerns at the ECB. The UK's preliminary composite S&P Global/CIPS PMI also fell into contraction territory, declining to 47.9 from 50.8 in July. This reading, the lowest since the beginning of 2021, reflects challenges similar to those in Europe. Market expectations of the terminal Bank Rate have fallen, reflecting uncertainties about economic outlook.
56. ASIA PACIFIC: U.S. Secretary of Commerce Gina Raimondo's visit to China for meetings with senior Chinese officials and American business leaders indicates efforts to address issues through dialogue. This may pave the way for a potential meeting between U.S. President Joe Biden and Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation meeting in November. China's decision to suspend seafood imports from Japan due to concerns about nuclear-contaminated wastewater will likely impact Japan's fishing industry. Baidu's strong Q2 earnings and investment in AI bode well for its future, with the launch of the Ernie 3.5 generative AI large language model contributing to its positive outlook.

Previous update:

Institutional Opinions:

1. Market Outlook for the Rest of the Year: The recent weakening of the market in August, following a significant rally from March to July, is seen as a normal and healthy pullback. This downturn doesn't necessarily indicate a pessimistic sentiment, but rather a recalibration in response to the rapid gains. Despite expectations of a slowdown in the economy, there is no indication of an impending severe downturn. Instead, the prevailing belief is that if the economy manages to avoid a substantial recession and maintains its robust employment conditions and consumer financial stability, the gains made since the bear market low of the previous year are not likely to be significantly reversed. As the year progresses, changes in economic expectations are expected to play a pivotal role in influencing market movements.
2. Small-Cap Stocks and Economic Expectations: The recent retreat in small-cap stocks is interpreted as a necessary adjustment towards more realistic economic forecasts, rather than a signal of imminent economic collapse. The notion of a "rolling recession" emerges, suggesting that different sectors of the economy may undergo periods of deceleration at different times, leading to a moderate overall decline in GDP growth. While consumer spending is projected to slow, it's anticipated that consumers won't completely halt their expenditures. The shift in spending habits, with an emphasis on services and leisure activities, is supported by recent data.
3. Interest Rates and Fed Policy: The recent surge in interest rates is attributed to a shift in consensus expectations surrounding Federal Reserve (Fed) policy. The notion is that the Fed will opt for an extended period of higher policy rates, influenced by the persistent strength of economic growth. The increase in long-term rates is seen as a reflection of this heightened economic vitality rather than a precursor to immediate rate hikes by the Fed. The expectation is that inflation will continue to stabilize, implying that the Fed will not need to rapidly tighten its policies. This points to the concept of "higher for longer" rates, rather than a sudden and drastic escalation.
4. Tech and Growth Stocks: The current retreat observed in technology and growth stocks during August is interpreted as a necessary correction, aimed at reducing the excessive enthusiasm and valuations that had accumulated in these sectors. Rather than implying a fundamental breakdown, this pullback is viewed as a precautionary step in the wake of an impressive rally. Notably, while these sectors experienced a dip in stock prices, their earnings held up relatively well, indicating that the correction might be more influenced by valuation concerns and the impact of rising interest rates than by a broad decline in market fundamentals.
5. Market Volatility: Anticipations point to increased market volatility in the upcoming months compared to the previous period, implying that fluctuations in the market are likely to become more pronounced. Market participants should consider using a correction in stock prices as an opportunity to rebalance portfolios, taking advantage of what is seen as a more sustainable bull market trajectory over the longer term.?
6. U.S. Corporate Earnings and Profit Margins: U.S. corporate earnings have exhibited a year-long stagnation, but Q2 results managed to surpass low expectations, primarily due to improved profit margins. The outlook for expanding profit margins into the next year appears optimistic, although caution is advised as the author advocates a selective approach in equities. The possibility of a margin squeeze looms due to worker shortages pushing wages upward, challenging the sustained growth in profit margins despite the favorable consensus view.
7. Inflation and Labor Market Dynamics: The data underscores the continuation of inflation volatility, shaped by evolving supply and demand dynamics. A pivotal observation is that a structural labor shock is taking precedence as an inflation driver. The pandemic-induced shifts in spending and labor market disparities are unwinding, leading to a new phase of inflation. The aging population adds another layer of complexity, potentially intensifying labor shortages and fueling wage pressures. This scenario might contribute to sporadic inflation spikes as labor market dynamics change.
8. Market Volatility and Central Bank Policy: The market's recent behavior, marked by U.S. stock stability and surging 10-year Treasury yields amid volatile trading, indicates ongoing market volatility. The shifting dynamic is influenced by economic data, such as CPI reports. The perception that central banks will not hastily ease policies in the face of supply constraints emerges. Rather, central banks are expected to adopt tighter policies to counter inflationary pressures, signaling a departure from the era of steady growth and inflation known as the Great Moderation.
9. Investment Themes and Strategies: The evolving market volatility brings forth a trend of divergent security performance, prompting a more detailed and selective investment approach. As markets become more volatile, the data suggests that deviations from index performance will become more significant, providing opportunities for targeted investments. A focus on security selection, expertise, and skill is seen as crucial for achieving above-benchmark returns. The investment themes highlight the importance of identifying mega forces, such as AI and geopolitical shifts, and harnessing their potential for gains.
10. Inflation Trends and Aging Population Effects: The data illustrates recent core inflation trends that point to progress in managing inflation issues. Notably, goods prices are contributing to a decline in inflation as demand normalizes. However, a noteworthy shift is expected as the economy transitions from one shock (pandemic-related shifts) to another (effects of an aging population). This transition could lead to inflation experiencing a rollercoaster ride, as changes in labor dynamics and job growth interact with economic dynamics.
11. Macro Strategy—Market and Macro Themes to Consider: This analysis presents key macro and market themes driving recent investment performance and offers insights into their future outlook. The current global geoeconomic backdrop reinforces U.S. structural advantages, driving asset flows and relative equity outperformance. The U.S. enjoys secure food and energy supplies, a lead in high-growth and margin businesses, and maintains its world reserve currency status. As other engines of growth struggle, U.S. equities appear more attractive. The U.S. is witnessing an economy that prioritizes jobs even as profits decline. Nonfinancial corporate productivity contracted while corporate profits faced challenges. Consumer spending on services has remained strong due to labor hoarding, supporting overall growth despite sectoral challenges. New home construction trends have driven the performance of homebuilder stocks, while existing home sales faced weaknesses. The underbuilt housing market over the last decade has boosted new home builders and sales, influencing consumer discretionary stocks. Inflation has slowed since its peak, with the Federal Reserve tightening monetary policy. The end of rate hikes may be approaching as inflation moderates and economic growth potentially slows. Markets are also pricing in future Fed cuts. Despite an earnings recession in the S&P 500, results have generally exceeded fears. Small-cap earnings have been worse, but the overall outlook remains relatively flat for 2023. Expectations for strong earnings growth exist for the following year. Equity market gains have largely relied on valuation expansion, with specific stocks driving most of the index's gains. Broader equity action has shown resilience but also revealed emerging meme stocks, indicating mixed market dynamics.
12. Market View—The Rise of a "Mixed Economy": The shift towards a mixed economy, where government intervention is prominent alongside the private sector, has important implications for investors. The era of minimal government regulation is evolving, with increased state activism shaping markets and economies. Government as a catalyst for growth and innovation is explored, highlighting public investment's role in technological advancements.
13. Crosscurrents in Action—Navigating Uncertainties: The analysis observes conflicting signals in the global economy, akin to crosscurrents within a collision of oceans or macroeconomic regimes. Economic resilience and sentiment have supported risk assets, defying recession concerns. However, concerns about liquidity, tightening monetary policy, and global economic challenges pose potential headwinds for equity markets.
14. Investment Implications: Maintaining a balanced approach with a neutral weight to equities and a preference for high quality across asset classes is advised. The geoeconomic backdrop supporting U.S. structural advantages is expected to continue, favoring relative U.S. equity flows. Quality and large-cap stocks are favored due to their resilience in challenging environments. Investors should closely monitor housing sales, inflation trends, and earnings outlook. Reinvestment risk becomes prominent, suggesting a slightly long-duration position. While sentiment remains positive, potential liquidity challenges and global economic uncertainties underscore the need for a diversified, balanced portfolio.
15. Economic Resilience and Growth Slowdown: The data indicates that the economy showed remarkable resilience after the pandemic-induced shock in 2020. The support came from various factors, including economic stimulus, cash injections by the Federal Reserve, and pent-up consumer demand. However, the text suggests that these supports are expected to reverse in the balance of 2023 and into 2024. This implies that economic growth is likely to slow down, and corporate profits might decline, potentially leading to a more challenging economic environment.
16. Tightening Financial Conditions: The data suggests that financial conditions have already tightened due to factors like declines in the money supply, tightened credit standards by banks, and rising inflation-adjusted interest rates. This could lead to an accelerated rise in corporate bankruptcies and impact economic activity. This tightening could also have implications for equity markets and valuations.
17. Labor Market and Consumer Spending: The data indicates that while job gains and wage growth have been strong, they are beginning to soften around the edges as labor supply rebalances with demand. This trend is likely to continue, impacting consumer spending. Spending growth on services, which was initially strong due to pent-up demand, has begun to slow down. This could affect sectors like autos, travel, and entertainment.
18. Inflation and Monetary Policy: The data suggests that inflation's outlook has become uncertain, influenced by factors like energy, food, and shelter prices. Slower progress against inflation could delay improvements in real incomes and lead to more rate increases by the Federal Reserve. This indicates that inflation dynamics will be important to watch, as they can impact both economic growth and monetary policy decisions.
19. Equity Market Performance: The equity market has experienced a stall due to factors like rising long-term interest rates, concerns about a slowing economy, lingering inflation, and lackluster earnings. This could lead to downward pressure on equity valuations. The suggestion to stay defensively positioned in equities and to wait for a better risk-reward tradeoff indicates a cautious outlook for equity market performance.
20. Oil Prices and Supply: The data suggests that tight global oil supply has been a significant factor driving higher crude oil prices. As long as global supplies remain tight and demand holds up, the outlook for oil prices remains positive. The expectation of a U.S. recession in 2024 might impact oil prices, but tight global supply is expected to remain a driving force.
21. Hedge Fund Performance: Hedge funds, particularly long/short equity strategies, have shown varied performance. Lower-risk strategies achieved positive returns, while higher-risk ones experienced more significant declines but have rebounded. The preference for more defensive strategies that offer consistent results indicates a cautious approach to hedge fund investments.
22. Municipal Bonds and Fixed Income: The U.S. municipal bond market has seen positive performance, and this trend is expected to continue despite concerns over a potential recession. While municipal bonds appear somewhat expensive compared to historical averages, the technical imbalance between supply and demand continues to support municipal bond valuations. Municipal investors are advised to undertake meticulous credit research or access professional management.
23. Equity Market and Interest Rates: The recent rise in interest rates is a significant factor affecting the direction of equities. The US 10-year yield is challenging a key trading range at 4.24-4.33%. If rates break out above 4.33%, it could lead to further equity weakness, particularly impacting growth/technology stocks. Conversely, a move below 4.09% could signal a potential reversal in rates to the downside.
24. Equity Performance and Seasonality: The outlook for equity markets suggests a weak and choppy trading range into September. Weekly momentum indicators indicate overbought levels, and seasonality remains unfavorable through much of September. Key support levels are identified for the S&P and Nasdaq indices.
25. Short-Term Equity Momentum: Short-term momentum indicators indicate that the equity market is oversold, and an upward bounce is likely in the short term. However, further consolidation is expected into September. The S&P is testing a support band near the March uptrend and its rising 50-day moving average.
26. Oil and Exploration and Production Index: WTI Oil is viewed as being in a broad bottoming pattern after a correction in Q2 2023. A short-term pullback is underway, and support is expected in the 74-77 range. The S&P 500 Exploration and Production index is also pulling back from resistance, and there's an expected support band between 622 and 593.
27. Healthcare Sector as a Safe Haven: The S&P 500 Healthcare sector is considered a relative safe haven during the seasonal weakness of Q3. While other growth stocks have pulled back, the Healthcare sector is showing signs of improvement despite lagging the broader market.
28. Commercial Real Estate Challenges: The commercial real estate sector, especially downtown office space, is facing challenges due to remote work trends and elevated interest rates. Large office towers in central business districts are experiencing declining occupancy rates, leading to rental income reduction and refinancing difficulties. This trend is expected to continue, and the sector may witness further price declines in some commercial assets. Not all types of commercial real estate are affected equally. Industrial and warehouse properties are seeing high demand and stable to rising lease rates, while office space is impacted by remote work. Differences are also observed between regions and asset types. The challenges in the commercial real estate sector are unlikely to cause widespread economic fallout. The sector's scale, low direct exposure in investor portfolios, and manageable banking system exposure contribute to the broader economy's resilience.
29. US Economic Data: Economic data from the US suggests mixed sentiment. Despite negative news in the commercial real estate sector, strong July retail sales and industrial production growth indicate that tighter monetary policy is having limited impact on real economic activity.
30. UK Inflation and Monetary Policy: The UK is grappling with stronger-than-expected inflation, challenging the Bank of England's (BoE) efforts to meet its 2% inflation target. The BoE is likely to raise rates further to address inflation, and policymakers are focusing on labour market tightness, wage growth, and services inflation as determinants of future policy actions.
31. China's Property Market and Developers: China's property market is facing challenges, with slowing pre-sales and declining home prices. Large property developers like Country Garden Holdings are experiencing liquidity issues and potential defaults, adding pressure to the Chinese real estate sector and the broader economy.
32. China's Tourism Resumption: China's decision to lift bans on group tours to Japan, South Korea, the US, UK, and Australia is expected to have a positive impact on retail, cosmetics, and travel sectors in those countries. This resumption of group tours indicates the potential for increased Chinese travelers and benefits various industries in those regions.
33. Equity Market Pullback: The equity market is currently experiencing a minor pullback, with the S&P 500 down by 3.8%, the Nasdaq down by 6.1%, and the Russell 2000 down by 5.6%. This pullback is the most significant since the March banking crisis.
34. Technical Analysis and Support Levels: Technical analysis indicates that the S&P 500's price action has become heavier, and the index recently closed below its 50-day moving average for the first time since March. The market's recent strength and elevated valuations are making equities susceptible to a correction. Significant support levels for the S&P 500 are seen in the 4200-4328 range, reflecting a 6-8% drawdown from the peak. This level of drawdown is considered normal historically.
35. Market Sentiment and Momentum: Market sentiment appears to be moderating, with examples of failed rallies and a "buy on the rumor, sell on the news" trend. The current pullback is seen as a market normalization from overbought conditions, and a "buy the pullback" mentality is likely to emerge soon. While the market is near short-term oversold levels, it may still have further to go on the downside before the drawdown is over.
36. Seasonal Trends: The historical seasonal trend suggests that the period from August through October is the seasonally softest for the equity market. While it's not recommended to base investment decisions solely on the calendar, this historical pattern is worth considering.
37. Market Pricing and Valuation: The equity market appears to be pricing in a soft-landing economic scenario, with a focus on the rebound of economic leading indicators. However, the current high valuation multiples, such as a forward P/E multiple of 19x for the S&P 500, suggest that investors are expecting a rebound that might take time to materialize.
38. Inflation and Economic Trajectory: Core CPI has risen by 0.2% for the second consecutive month, moving towards the Fed's target range of 2-2.5% y/y. The trajectory of inflation is expected to be uneven due to factors like rising oil prices and elevated wages, which could impact both prices and corporate earnings.
39. Market Technical Indicators: Various technical indicators, such as the percentage of stocks above their moving averages, suggest that while the market may be near oversold levels in the short term, it's not yet at extreme oversold conditions that are typically associated with significant drawdown periods.
40. Market Path and Volatility: While a bounce is expected, the extent of the bounce and subsequent market behavior will provide insights into the path ahead. If the bounce is limited and equities break lower, the likelihood of further downside increases. However, barring a significant negative catalyst, the pullback is considered a market normalization within a larger uptrend.
41. U.S. Equity Market Movement: The U.S. equity market experienced a retreat for the third consecutive week due to several factors. The primary reasons include a sharp increase in longer-term bond yields and concerns about a slowdown in China. The S&P 500 Index ended the week down 5.15% from its recent peak on July 26. Growth stocks were impacted more than value stocks, while small-cap stocks performed the worst.
42. Economic Indicators and Consumer Spending: The release of July retail sales data showed a significant increase of 0.7% over the month, surpassing consensus estimates. This surge in sales indicates that consumers are continuing to spend, particularly in discretionary categories such as restaurants, bars, and online purchases. However, gas station sales saw a notable decline of 20.8%.
43. Economic Outlook and Industrial Production: Despite concerns, some economic data suggest the possibility of the economy avoiding a "soft landing" or "hard landing." Industrial production grew by 1.0% in July, much higher than consensus estimates, and a gauge of manufacturing activity in the mid-Atlantic region indicated expanding factory activity, orders, and shipments for the first time in 14 months. Housing starts also rose beyond expectations.
44. Federal Reserve and Rate Expectations: The release of the Federal Reserve's July policy meeting minutes raised worries about the central bank's response to continued economic growth. The minutes were interpreted as generally hawkish, even as Fed officials expressed hopes for gradual slowing in real GDP growth to address demand-supply imbalances.
45. Economic Growth Forecasts: Growth forecasts for the U.S. economy appear to be rising. The Atlanta Fed's GDPNow forecast for the current quarter jumped to 5.8%, well above the second-quarter growth rate of 2.4%. Economists in the "Blue Chip" survey are also revising their growth forecasts higher. Despite this, rate hike expectations as measured by the CME FedWatch tool remained relatively stable, suggesting that rates might stay at their current level through the end of the year.
46. Treasury Yields and Bonds: The positive economic surprises led to a rise in the benchmark 10-year U.S. Treasury yield to its highest level since at least October 2022. However, there were concerns about heavy issuance and supply, affecting bond markets. Investment-grade corporate bonds underperformed Treasuries, particularly in the auto sector.
47. European Markets: European stock markets experienced declines, primarily driven by concerns about China's economic outlook and higher European interest rates. Major indexes such as the STOXX Europe 600, CAC 40, DAX, FTSE MIB, and FTSE 100 all weakened.
48. UK Economic Indicators: In the UK, wage growth accelerated, increasing pressure on the Bank of England to raise interest rates further. While annual inflation slowed in July, core inflation remained strong. Signs of cooling in the labor market also emerged, with a higher unemployment rate.
49. Japan's Economic Performance: Japan's stock markets declined due to concerns about China's economic weakness. However, Japan's second-quarter GDP growth exceeded forecasts, driven by external demand. Consumer price inflation remained elevated, and the yen weakened against the U.S. dollar.
50. China's Economic Challenges: Chinese stocks faced declines amid pessimism about the country's economic recovery. Weak economic activity, including industrial output and retail sales growth, raised concerns. The property market downturn also continued, impacting China's economic outlook. The People's Bank of China unexpectedly cut rates, reflecting efforts to address weak demand.
51. Emerging Markets (Peru and Argentina): Peru's central bank kept its policy rate unchanged but signaled a potentially dovish stance in the future. Argentina allowed its currency to devalue against the U.S. dollar, along with a key interest rate hike, as the country faces inflation and financial challenges.
52. Market Concentration and Narrowness: The S&P 500's year-to-date gains have been highly concentrated, with the top 10 stocks accounting for a significant portion of the index's overall performance. As of the last market close, these top 10 stocks contributed to 90% of the index's year-to-date gains. However, the situation has improved compared to May, where the entire year-to-date gains were solely driven by the 10 largest stocks. This narrowing trend in market breadth suggests that the market rally has become less reliant on a handful of stocks.
53. Economic Data and Profit Growth: The broadening of the market's performance can be attributed to resilient economic data, which has in turn fueled better-than-expected profit growth and overall stock market performance. Despite the narrowness in earlier months, the current situation indicates a more diversified and stronger market landscape. Notably, the consumer sectors, construction, travel, and streaming/gaming industries have exhibited particularly strong profit growth.
54. Moderate Broadening and Mega-Cap Tech Stocks: The broadening of market performance has been moderate, indicating that while the concentration of gains has lessened, mega-cap tech stocks still hold significant sway over the market. Although the concentration has reduced from peak levels seen in April/May, the top 10 stocks still account for over 30% of the index. This level is historically high, suggesting that these stocks continue to wield substantial influence.
55. Earnings Contribution vs. Weight: An interesting disconnect exists between the weight of the top 10 stocks in the index and their contribution to earnings. While their weight has decreased from peak levels, the earnings contribution remains near pre-COVID levels but is below the pandemic-era highs. This mismatch suggests that the valuation of these stocks might not be entirely aligned with their earnings potential.
56. VIX and Confidence: Despite the concentration of gains and valuation concerns, the VIX (Volatility Index) has remained at historically low levels. This suggests that market participants have grown increasingly confident in a soft landing scenario, wherein the economy avoids a severe downturn. Low volatility could be indicating optimism about the market's resilience.
57. Inflation and Fed's Hawkish Stance: The sustainability of the market's performance is closely tied to the trajectory of inflation. If core CPI (Consumer Price Index) remains sticky and continues to rise, it might prompt the Federal Reserve (the Fed) to maintain a hawkish stance on monetary policy. This could increase the likelihood of a recession, as tighter monetary conditions might impact economic growth.
58. Earnings Revision and Vulnerability: In the event of a more hawkish Fed stance and increased inflation, there is a risk of earnings being revised lower. Given that valuations are already stretched, such a scenario could leave the market vulnerable to corrections or declines. The concentrated gains in specific sectors, especially mega-cap tech stocks, might experience more significant impact.
59. Investment Strategy: Given the potential for increased market volatility and the risk associated with stretched valuations, investors are advised to take advantage of historically wide valuation dispersion. This involves focusing on low beta stocks, which are characterized by stable cash flows and solid balance sheets. This strategy aims to mitigate risks and capitalize on stability amid uncertain market conditions.