Chris Kamykowski, CFA®, CFP® – Head of Investment Strategy and Research
Tim Side, CFA® – Investment Strategist
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Monthly Observations
Historically Weak Month Proves Weak
Volatility turned upward after a calm summer in both equity and rates markets with pressure on valuations arising from Chinese economic growth concerns and sharp increases in bond yields. Global equity markets sold off with US large cap able to stem the downside with support from growth stocks. US large cap exceeded small cap meaningfully, reversing recent leadership from the latter. Outside the US, developed markets outperformed emerging markets which was largely due to weakness emanating from China as it deals with slowing growth and real estate concerns. Rates climbed sharply as investors fretted about potential for “higher-for-longer” due to persistent inflation above the Fed’s target and a resilient US economy. The yield on the US 10-Year Treasury hit year-to-date highs, and levels not seen since late 2007, before ending up nearly 0.30% for the month. The overall risk-off sentiment during the month saw real estate and infrastructure returns fall in line with risk markets.
Jackson Hole Points to Extended Hold
Fed Chair Jerome Powell’s speech at the Fed’s Jackson Hole symposium noted that the FOMC will “proceed carefully” when deciding whether to hike or hold the policy rate constant at future meetings. Markets generally took this to mean that the FOMC does not intend to hike at the September meeting. Powell was slightly more hawkish than at the July press conference when characterizing the risks to the outlook, saying that the FOMC is “attentive to signs that the economy may not be cooling as expected.”
Fitch Downgrades US Credit Rating
Early in the month, ratings agency, Fitch, downgraded the US to AA+, one notch lower than the previous AAA rating. Fitch noted the decision was based on “expected fiscal deterioration over the next three years, a high and growing government debt burden and erosion of governance….over the last two decades”.
Commentary From Asset Managers
U.S. Large Cap Growth Manager
The recovery in large cap growth stocks from 2022 to 2023 was very quick and narrow. If the market continues its current trend, US stocks will have been up almost 21% annually over the last seven years, three times the historical market return of 7-8% per annum. Given the higher rate environment, this manager expects more moderate growth going forward that is closer to normal patterns.
US Small/Mid Cap Manager
Much of US industrial capacity was outsourced, making it a scarce resource and creating opportunities in the industrials sector. Now they are starting to see onshoring production to the US, something that hasn’t been witnessed in the last 20 years.
Global Asset Manager
The AI hype continues to wane. Companies spent much time on AI during earnings calls/analyst days, and now it’s time to start putting up results. Anecdotally, the experience of these products has underwhelmed users, and the novelty could wear off quickly. Yes, there’s a “cool” factor and real-world use cases, but aside from executives in leather jackets, it’s unclear how most will monetize and implement. Time will tell over the next 12 months, but investors are already growing a bit anxious.
DISCLOSURES
© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.
Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
SOURCES
Morningstar Direct as of 08.31.2023
Bloomberg as of 08.31.2023
Manager comments come from discussions with various asset managers and are broad commentary on sectors and not be considered recommendations by any asset manager. These comments do not necessarily reflect strategy allocations or the view or opinion of MGIA or Moneta Group.
DEFINITIONS
The S&P 500 Index is a free-float capitalization-weighted index of the prices of approximately 500 large-cap common stocks actively traded in the United States.
The NASDAQ Composite Index is a market capitalization weighted index with more than 3000 common equities listed on the NASDAQ Stock Market.
The Russell 1000® Index is an index of 1000 issues representative of the U.S. large capitalization securities market.
The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000® Value Index measures the performance of those Russell 1000 Index securities with lower price-to-book ratios and lower forecasted growth values, representative of U.S. Securities exhibiting value characteristics.
The Russell 2000® Index is an index of 2000 issues representative of the U.S. small capitalization securities market.
The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies.
Bloomberg U.S. Treasury Bond Index includes public obligations of the US Treasury, i.e. US government bonds. Certain Treasury bills are excluded by a maturity constraint. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded.
The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. It includes general obligation and revenue bonds, which both can be pre-refunded years later and get reclassified as such.
The Bloomberg U.S. Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the indices’ EM country definition, are excluded.
The US Dollar Index measures the US dollar against six global currencies: the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.
The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
The S&P Global Listed Infrastructure index measures the performance of global companies that are engaged in infrastructure and related operations. It provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure, the index includes three distinct infrastructure clusters: utilities, transportation and energy.
Brent crude is the most traded of all of the oil benchmarks, and is defined as crude mostly drilled from the North Sea oilfields: Brent, Forties, Oseberg and Ekofisk (collectively known as BFOE).
The Dow Jones Commodity Index Gold is designed to track the gold market through futures contracts.
The ICE BofA Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The Corporate Master OAS uses an index of bonds that are considered investment grade (those rated BBB or better). When the last calendar day of the month takes place on the weekend, weekend observations will occur as a result of month ending accrued interest adjustments.
The ICE BofA Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The ICE BofA High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).
Asset class valuations are a percentile ranking based on monthly data going back to common inception of 9/1/2006. The US Large Cap percentile is the average percentile ranking of the trailing P/E, P/B, P/S, and P/C ratio of the S&P 500 Index. The US Small Cap percentile is the average percentile ranking of the trailing P/E, P/B, P/S, and P/C ratio of the Russell 2000 Index. The International Developed percentile is the average percentile ranking of the trailing P/E, P/B, P/S, and P/C ratio of the MSCI EAFE NR Index. The Emerging Market percentile is the average percentile ranking of the trailing P/E, P/B, P/S, and P/C ratio of the MSCI Emerging Markets NR Index. The 10-Year US Treasury percentile is the percentile ranking of the 10-Year US Treasury yield. The Investment Grade percentile is the percentile ranking of the ICE BofA US Corporate option adjusted spread. The High Yield Corporate percentile is the percentile ranking of the ICE BofA US High Yield corporate option adjusted spread. The Municipal/Treasury percentile is the percentile ranking of the Bloomberg Municipal Index yield divided by the 10-Year US Treasury Yield.
