Insight Archive - Concord Asset Management

Weekly Market Insights – Monday, September 25, 2023

Summer Ends on a Gloomy Note for Stocks:

Stocks suffered significant losses last week as rising bond yields and concerns about a possible government shutdown dampened investor sentiment. Technology stocks were hit especially hard, bearing the brunt of the retreat.

Over the last month, The Dow Jones Industrial Average returned –1.03%, while the S&P 500 returned –1.54%. The Nasdaq Composite Index returned –2.11%.

Source: Charles Schwab & Co, Inc.

Stocks Decline

Investor sentiment took a decidedly negative turn last week when investors were caught off-guard by the Fed signaling another potential rate hike this year, upending hopes that the Fed might finish its current rate-hike cycle.

Stocks declined sharply following the Federal Open Market Committee (FOMC) announcement and continued to fall the following day as bond yields spiked. The 10-year Treasury yield hit 4.48% on Thursday, touching its highest point in more than 15 years.¹

Stocks also reacted to news that the House of Representatives went into recess on Thursday, increasing the prospect of a government shutdown. The sell-off cooled on Friday, adding only incrementally to the week’s accumulated losses.

Fed Signals Another Rate Hike

As expected, the Fed held interest rates steady but surprised many investors by signaling another rate hike before year-end and suggesting that rates may need to remain high through 2024. In his post-announcement press conference, Fed Chair Powell remarked the inflation battle would continue, and upcoming economic data would inform the FOMC’s future rate hike decision.

In their economic projections, 12 of 19 Fed officials expect to raise rates once more this year (the FOMC meets again on October 31-November 1 and again in December). The Fed also lowered their unemployment projection from their June estimate and revised their projection for annual core inflation to 3.7% in the fourth quarter, down from June’s 3.9% forecast.²

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹CNBC, September 21, 2023

²The Wall Street Journal, September 23, 2023

The companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) and serves as a benchmark of the performance of major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid. Fixed income investments are subject to various risks, including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications, and other factors. International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility. Please consult your financial professional for additional information. This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security.

Concord Asset Management, LLC (“CAM”) is a registered investment advisor with the Securities and Exchange Commission. CAM is affiliated, and shares advisory personnel with Concord Wealth Partners (“CWP”). CAM offers advisory services, including customized sub-advisory solutions, to other registered investment advisers and/or institutional managers, including its affiliate, Concord Wealth Partners, LLC. CAM’s investment advisory services are only offered to current or prospective clients where CAM and its investment adviser representatives are properly licensed or exempt from licensure.

The information provided in this commentary is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CAM or its affiliates, or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from CAM or CWP. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. CAM and CWP are neither law firms nor certified public accounting firms, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of CAM’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at https://concordassetmgmt.com/.

Please Note: If you are a CAM or CWP client, please remember to contact us, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CAM and CWP shall continue to rely on the accuracy of the information that you have provided. Please Note: If you are a CAM or CWP client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Weekly Market Insights – Monday, September 18, 2023

Stocks Hold Their Breath, Awaiting Fed’s Next Move:

Stocks closed last week with little change, as investors processed a combination of new economic data that presented a mixed picture.

Over the last month, The Dow Jones Industrial Average returned 0.58%, while the S&P 500 returned 2.06%. The Nasdaq Composite Index returned 3.17%.

Source: Charles Schwab & Co, Inc.

Stocks Searching for Direction

Stocks traded around the flatline without significant movement, lacking a catalyst in either direction. On Thursday, investors were encouraged by the European Central Bank’s indication that its rate-hiking campaign may be coming to an end, as well as a successful IPO that reinvigorated optimism in the capital markets. Investors also celebrated a strong retail sales report and a modest rise in core producer prices, overlooking a higher-than-anticipated headline number.

However, sentiment quickly reversed on Friday due to declining consumer confidence, troubling news in the semiconductor space, and a labor strike at the nation’s major automakers, sending major averages to a mixed close for the week.

Inflation Progress Stalls

Surging gasoline prices drove August’s inflation rate to its highest monthly rate this year, rising 0.6%, while the year-over-year Consumer Price Index posted a 3.7% increase, up from July’s 3.2% annual rate. Core inflation (excludes energy and food) was more encouraging, rising 4.3%– down from July’s reading of 4.7%.¹

Producer prices also came in higher than expected, rising 0.7% in August, above the estimate of a 0.4% increase and the biggest monthly gain since June 2022. The year-over-year increase was a more modest 1.6%. Gasoline prices significantly contributed to the month’s jump; excluding food and energy, prices aligned with forecasts, ticking up 0.2% in August.²

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹Wall Street Journal, September 13, 2023

²CNBC, September 14, 2023

Weekly Market Insights – Monday, September 11, 2023

Fed Rate Hike Concerns and Rising Oil Prices Cast Shadow on Stocks:

Investor sentiment soured last week as concerns about the possibility of the Fed raising interest rates caused stocks to decline during a shortened holiday trading week.

Over the last month, The Dow Jones Industrial Average returned –1.53%, while the S&P 500 returned 0.38%. The Nasdaq Composite Index returned 1.82%.

Source: Charles Schwab & Co, Inc.

Stocks Resume Their Decline

Stocks were bedeviled by rising bond yields and higher oil prices last week, with technology shares bearing the brunt of the decline. Hopes that the Fed may not find it necessary to raise interest rates were dented by economic data reflecting higher prices, rising labor costs, and fewer-than-forecast initial jobless claims.

The inflationary implications of higher oil prices also contributed to the growing sense that the Fed may implement additional rate hikes. While bond traders generally still expect no rate hike in September, the likelihood of a 0.25% rate hike or higher in November jumped to 43.3% by Friday morning from 35.4% a week ago.¹

Oil Prices Spike

Last week, Saudi Arabia and Russia announced they would extend their oil production cuts to the end of the year. Investors had expected these cuts to be stretched to October, so the three-month extension surprised the markets.

The announcement sent oil prices higher on supply shortage worries in the coming winter months, with the West Texas Intermediate (WTI) oil price climbing to a 10-month high.²

Higher oil prices also sparked concerns that it would make the Fed’s inflation fight more difficult, potentially forcing the Fed to hike rates above market expectations.

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹CME Group, September 8, 2023

²Reuters, September 5, 2023

Relative Value: An Investment Approach for Navigating Stormy Seas

By Gary Aiken | September 7, 2023

One year ago, I published a note dedicated almost entirely to Jerome Powell’s speech at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming. Chairman Powell’s comments were short and to the point. The Federal Reserve, under his leadership, was determined to snuff out inflation using all the tools at its disposal. He was determined to be remembered as the second coming of Paul Volker, who beat back the crushing inflation of the 1970s by taking interest rates into the high teens. In summary, Powell warned investors and those who live in the economy of the United States to expect pain.

And yet, a year later, even as the Federal Reserve has done exactly what the Chairman told us he would do, I doubt many would consider the past twelve months as significantly painful. The unemployment rate has remained low (3.8% for August) as Americans continue to find jobs and more rejoin the labor force. Real GDP growth has remained positive as consumers and the government continue spending. Although prices are still rising, the pace of inflation has slowed dramatically. The stock market, as represented by the S&P 500, is 16% higher today than it was at the end of August 2022, and the Intermediate Government/Credit Bond Index has managed to eke out a small 0.4% total return over the past twelve months. By these measures, it’s hard to reconcile the Chairman’s prescription for “pain” with what materialized.

Against that backdrop and maybe with a bit of humility and introspection, Powell turned from prophet of pain to poet in this year’s August Jackson Hole keynote. He waxed philosophically, “As is often the case, we are navigating by the stars under cloudy skies.” What do we, as investors, make of this circumspect and altogether humble public servant’s work and forecast? At Concord Asset Management, we have been upfront with our clients that although our base case is for a recession at some point, that doesn’t mean we are running for the hills.

Concord Asset Management invests client portfolios in a variety of different asset classes both directly and through exchange-traded funds (ETFs). We do not navigate by the stars. We have a framework for identifying attractive investments called “Relative Value.”

Relative Value is an approach to portfolio construction comparable to an optometrist visit. While pressing your face into a cold metal device, the optometrist asks, “Do you like A or B? B or C? One or two? Three or four?” and so on. The world presents an array of data and investment choices. Investors can use that information to determine their view on the valuation of a security. But, unlike economists who apparently must use astrolabes and sextants, investors get one more crucial data point: the current price determined by market participants. We know exactly where we are at any given time and thus can compare the price and value of security A to security B and make a judgment about the relative merits of those two options.

Still, relative value analysis starts with our macroeconomic view. We must consider monetary policy, the direction of inflation and interest rates, fiscal policy, trade and geopolitics, currencies, commodities, and countries. Sometimes, we use important ratios to form our base opinions. For example, the difference between short-term and long-term interest rates has meaningful properties for describing the probability-driven outcomes of the future. When short-term interest rates are higher than long-term interest rates, as they are today, historical evidence suggests that a recession is likely to follow. When short-term interest rates are higher than long-term interest rates, the yield curve is deemed to be “inverted.” The yield curve is not in its normal, upward-sloping shape.

A Normal Yield Curve is Upward Sloping

Source: Bloomberg Finance, L.P.

While the concept of an inverted yield curve is interesting, the important takeaway for investors is that this state of inversion is abnormal. Yield curve inversion is like a dissonant chord that must be resolved at some point. The resolution could be that short-term rates will go lower – a recession will eventually come, forcing the Fed to lower short-term rates quickly. Another resolution could also be that the Fed chooses to abandon, either publicly or effectively, its 2% inflation target. In this case, long-term interest rates would likely move higher to reflect higher future inflation expectations. Of course, there are alternatives in between and around these two extremes.

To discover relative value opportunities in this scenario, we analyze the two extremes. If a recession ensues, short-term rates will decline, inducing profits in short-term bonds. Further, in a recession defaults and distress increase. The highest quality bonds will be in greater relative demand than riskier junk bonds. Long-term rates will likely fall as inflation and real rates decline, meaning even greater profits for those willing to buy long-term bonds – whose primary thesis anticipates this particular outcome. In this scenario, investors at both the long and short ends of the yield curve will make money, but investors positioned at the long end will make more.

What if a recession is more elusive and inflation is resurgent or “sticky”? In that event, both short-term and long-term interest rates are likely to rise. Investors in the short end, with rates at current levels, may continue to make money even as short-term rates rise. They may find variable-rate bonds whose coupons reset higher along with interest rates. Our friends investing in long-term, fixed-rate debt will lose money quickly. Viewing this choice (Do you like “A” or “B”?) in this fashion, short-term, high-quality, and variable-rate bonds present value relative to intermediate and long-term fixed-rate bonds, and the bonds of the riskiest companies. That is how Concord Asset Management has positioned its clients this year, how we’ve framed our view in our 2023 Forecast and Halftime Reports, and how, until facts change, we will continue to invest.

It is likely that short-term interest rates will stay higher for longer in the face of persistent and sticky inflation. Chairman Powell remains committed to battling inflation through restrictive monetary policy. In our 2023 Halftime Report, we discussed the Fed’s favored inflation measure, Core Personal Consumption Expenditures (PCE). On the last day of August, this number was reported at 4.2%, well above the Fed’s target of 2%. So, interest rates will likely remain at their present level or move even higher until the effects of restrictive monetary policy have run their course.

Fed Policy is Restrictive

Source: Bloomberg Finance, L.P.

Just because we are risk-averse when it comes to fixed-income investing, doesn’t mean that we aren’t bullish when it comes to the stock market. Relative value in stock investing means comparing the prospects of U.S. stocks versus International Developed and Emerging Markets opportunities, then thinking about which sectors or trends are more favorable for investor prospects in both the short and long term. From this standpoint, we use relative value to determine our “overweight” and “underweight” positions.

At the beginning of the second half, we moved client portfolios to have about equal weight technology exposure. We thought that technology stocks had a terrific and somewhat surprising run in the first half of 2023, so we were rather cautious going into July and August. Still, we did not want to be underweight technology stocks because the long-term trends that make those companies attractive remain in place despite their seemingly high prices. At the same time, we thought energy stocks, which had been neglected during the year’s first half, were primed for a comeback in the face of oil prices gaining momentum. Finally, we continued to underweight banks and real estate as those sectors face challenges given the macroeconomic picture.

We are constantly reviewing these types of relative value sector and security positions. While our overall macroeconomic view is slow to change, markets are quick to reprice securities. Concord Asset Management strives to maintain a nimble approach to the securities in our client portfolios, taking gains when positions have grown too large (indicating their prices have climbed quickly) and buying positions we like when their prices have fallen.

Relative Value tends to have two positive side effects over the long run. First, it forces investors to act – buying low and selling high. Secondly, it restrains investors from unnecessary trading – introducing the discipline to let winners run and focus on tax efficiency. These two sides of the same coin emerge not because we are prescient, but because by looking at positions relative to other investment options, we are getting a fuller picture of the investment seascape. We allow the ship of our portfolio to rise and fall with the seas while course correcting when appropriate to stay in our risk tolerance lane and meet our long-term investment objectives.

I’ve purposefully returned to Chairman Powell’s nautical theme. It is hurricane season again on the East Coast of the United States. Despite the happy talk about “soft landings,” restrictive monetary policy is beginning to negatively influence segments of the economy. Some data points are starting to indicate growing stress on the U.S. consumer here at home, in Chinese real estate and business activity, and in near recessionary conditions throughout most of Europe. A tropical depression might be forming on the horizon – and it is unclear whether it will blow over quickly or develop into something more significant and pernicious.

The navigator on your financial journey is your Concord advisor. Having a plan, reviewing that plan, and working with your advisor during times of joy and stress are crucially important to your long-term investment success. I am honored to be working with incredible fiduciaries here at Concord Wealth Partners, who put our clients’ interests first. I appreciate the trust you’ve placed in me and my team.

Author

Gary Aiken, Chief Investment Officer

Gary Aiken is the Chief Investment Officer for Concord Asset Management and is responsible for macroeconomic analysis, asset allocation, and security selection as well as trading and investment operations.

Gary has over 21 years of investment experience and holds an undergraduate degree in economics from the University of Maryland and an MBA from The George Washington University School of Business.

—

Concord Asset Management, LLC (“CAM”) is a registered investment advisor with the Securities and Exchange Commission. CAM is affiliated and shares advisory personnel with Concord Wealth Partners (“CWP”). CAM offers advisory services, including customized sub-advisory solutions, to other registered investment advisers and/or institutional managers, including its affiliate, Concord Wealth Partners, LLC. CAM’s investment advisory services are only offered to current or prospective clients where CAM and its investment adviser representatives are properly licensed or exempt from licensure.

To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their individual situation, he/she is encouraged to consult with the professional advisor of their choosing. CAM and CWP are neither law firms, nor certified public accounting firms, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of CAM’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.concordassetmgmt.com. Please Note: If you are a CAM or CWP client, please remember to contact us, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CAM and CWP shall continue to rely on the accuracy of information that you have provided. Please Note: If you are a CAM or CWP client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Weekly Market Insights – Tuesday, September 5, 2023

Economic Softness Sparks Market Optimism:

Falling bond yields, spurred by weak economic data, helped lift stocks to weekly gains as investors sought higher returns in equities. This development brought relief to market participants and contributed to the overall positive performance of stocks last week.

Over the last month, The Dow Jones Industrial Average returned –1.88%, while the S&P 500 returned -0.23%. The Nasdaq Composite Index returned 0.79%.

Source: Charles Schwab & Co, Inc.

Stocks Rise on Slowing Economy

Investor sentiment turned positive last week as signs of economic softness were interpreted as reason for the Fed to hold off on further rate hikes. A downward revision of Q2 economic growth and fresh signs of a cooling labor market reversed the recent rise in bond yield. They helped trigger a stock bounce back following Fed Chair Powell’s speech at Jackson Hole the previous Friday.

It wasn’t all about bad news being viewed as good news, though. A series of solid earnings reports, an announcement by one mega-cap tech name introducing pricing for its AI tools, and fresh inflation data — in-line with market expectations–further boosted enthusiasm for stocks.

Labor Shows Signs of Cooling

Despite historic monetary tightening, the labor market has exhibited remarkable resilience, but last week’s employment data showed a cooling trend.

Job openings declined to their lowest level since March 2021, though they remained above pre-pandemic levels. Meanwhile, a survey of private sector hiring showed a slowdown in hiring, with employers adding 177,000 jobs in August–below the 371,000 added in July and short of economists’ forecast of 200,000.^1,2

Finally, the government’s monthly employment report showed the number of nonfarm payroll gains continued to decelerate in August, while June and July estimates were revised lower by 110,000.³

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹The Wall Street Journal, August 29, 2023

²CNBC, August 30, 2023

³The Wall Street Journal, September 1, 2023

Weekly Market Insights – Monday, August 28, 2023

Stocks Retreat as Powell’s Hawkish Talk Rattles Markets:

Last week, stock markets remained volatile, influenced by unpredictable bond yields and more headline news. However, markets ended the week on a positive note after Fed Chair Jerome Powell’s remarks regarding the monetary outlook.

Over the last month, The Dow Jones Industrial Average returned -2.31%, while the S&P 500 returned –2.66%. The Nasdaq Composite Index returned –4.17%.

Stocks Manage Gains

Stocks rallied on Monday on upbeat sentiment over the earnings release from a mega-cap semiconductor company scheduled for mid-week, only to see that momentum fizzle the following day on weak retail earnings and a credit downgrade of a handful of banks.

Stocks resumed their rally on weak economic data, which fueled hopes for future Fed dovishness. They also rose on expectations that earnings from a leading AI chipmaker would validate the AI narrative that propelled markets in the second quarter. Despite a blowout earnings report, stocks turned lower as investor attention quickly switched to Fed Chair Powell’s presentation scheduled for Friday.

After some initial jitteriness, investors responded well to Powell’s comments, posting gains to close the week.

Powell Stands Firm

Powell spoke on Friday at the Fed’s annual economic symposium in Jackson Hole, asserting that, despite considerable progress, inflation remained too high and additional rate hikes may be on the horizon. He acknowledged that previous rate increases had not yet thoroughly worked their way through the system, so caution about further hikes was needed.

Investors reacted to Powell’s comments far better than in August 2022, when a hawkish presentation sent stocks lower. Powell also addressed a growing feeling among investors that the Fed may eventually raise its inflation target to 2.5-3.0%. Powell rejected this idea unambiguously, stating that the two percent target would remain the Fed’s inflation goal.

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Weekly Market Insights – Monday, August 21, 2023

Markets Weather the Storm of Economic News and Indicators:

Last week, stocks continued their August decline as investor sentiment turned negative due to higher yields and disappointing economic data from China.

Over the last month, The Dow Jones Industrial Average returned -2.44%, while the S&P 500 returned -3.48%. The Nasdaq Composite Index returned –4.65%.

Stocks Wilt

Rising bond yields, driven primarily by strong economic data and the release of the minutes from July’s Federal Open Market Committee (FOMC) meeting that pointed toward Fed officials’ potential need to raise rates further, weighed on stocks throughout the week.

In a week of light trading typical of August, stocks were additionally buffeted by a string of economic data that painted a flailing economic recovery in China and warnings of potential downgrades of dozens of U.S. banks by Fitch, a credit-rating agency.

After the 10-year Treasury yield rose to its highest level since October 2022 on Thursday, yields eased on Friday, helping to arrest the week’s downward trend.¹

Retail Sales Surprise

Retail sales jumped 0.7% in July, the fourth-consecutive month of increasing consumer spending on goods. The report supported the growing narrative that the U.S. may be able to avoid a recession in the near term. The strong spending data, supported by a robust labor market, also may have placed the Fed in a more difficult position in trying to bring inflation down to its target rate without more rate hikes.²

Consumer spending was higher in most categories, including bars and restaurants, grocery and hardware stores, and back-to-school items like books and clothing. Sales of autos and electronics fell, a possible consequence of higher borrowing costs.²

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹CNBC, August 18, 2023

²The Wall Street Journal, August 15, 2023

Weekly Market Insights – Monday, August 14, 2023

Summertime Blues for the Markets:

Despite positive inflation data, stocks remained trapped in the doldrums of August last week. Disappointing economic data and a downgraded U.S. debt rating took a toll on investor sentiment, creating a less-than-desirable market environment.

Over the last month, The Dow Jones Industrial Average returned 2.51%, while the S&P 500 returned -0.70%. The Nasdaq Composite Index returned –2.95%.

Tech Weighs on Stocks

Stocks struggled last week, beginning on a strong note ahead of key inflation data and selling off mid-week in response to a downgrade of the banking sector by credit rating agency Moody’s and news of a steep drop in China’s exports. Emblematic of the week, stocks jumped to big gains following Thursday’s better-than-expected inflation report, only to evaporate as bond yields rose amid an auction of 30-year Treasury bonds.

Stocks have had difficulty sustaining traction with the loss of the technology’s leadership, which has propelled gains this year. The combination of higher yields and earnings that failed to validate tech’s elevated valuations has dragged the sector and the larger market.

Subdued Inflation

July’s inflation data reflected only moderate price pressures. Consumer prices increased by a modest 0.2%, which aligned with market expectations. In comparison, the annual inflation rate came in at 3.2%, slightly below consensus estimates–though higher than June’s annual increase of 3.0%. Core CPI (excludes food and energy) was particularly encouraging, rising at the slowest rate since October 2021.¹

Producer prices painted a more mixed picture, coming in a bit higher than expected, rising 0.3% versus the expected 0.2% increase, though the year-over-year increase was just 0.8%. Core producer prices’ 12-month increase of 2.4% tied for the lowest since January 2021.²

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹CNBC, August 10, 2023

²CNBC, August 11, 2023

The Dollar — Reserve Currency Forever?

By Gary Aiken | August 10, 2023

The United States Dollar is the world’s reserve currency, true or false? Partly true. The Dollar is one of many reserve currencies. Reserve currencies are units of money held by central banks around the world to facilitate trade and ensure the relative stability of their own country’s currency. The U.S. Dollar holds its place as the dominant reserve currency because the preponderance of trade around the globe is settled ultimately in dollars. Reserve currency status does not necessarily flow from military or political hegemony. Our country’s relative economic standing in world trade holds more importance. Reserve currencies are relatively stable. Importantly for citizens, demand from foreign investors for dollar-denominated investments helps U.S. companies and consumers get easier financing terms, all else equal.

Those tweeting about the demise of the Dollar are quite late to the game. The Dollar’s place in the hierarchy of reserve currencies has been declining for over twenty years. The chart below shows the percentage of global reserves held in U.S. Dollars. It also shows the U.S. share of global, inflation-adjusted GDP over the same time period. The trend of lower weightings of the U.S. Dollar is consistent with U.S. GDP share declines since the Euro was introduced. However, let’s not read too much gloom and doom into this relationship.

US Share of Global GDP and Dollar Reserves

Source: Bloomberg Finance, L.P.

Over the past 25 years that the Euro, the Yen, and a host of other currencies have eroded the dollar’s reserve standings, the U.S. economy has grown at an average real rate of 2.2% per year. The Eurozone grew only at a 1.5% average annual pace during that time. So, the economic growth of the United States has not been hindered by the decline in the Dollar’s share of global reserves. It seems that economic growth is not strongly correlated with a country’s reserve standings or status.

Politics drives the direst projections. China and a league of other countries are beginning to talk about trading certain commodities, including oil, in their own currencies. Political and military struggles have had an impact on inflation and the relative value of the Dollar in trade in the past. The expense of the Great Society and the Vietnam War caused the U.S.’s trading partners to doubt the United States’ capacity to meet its obligations in the late 1960s and early 1970s. At that time, the U.S. dollar was directly convertible into gold. As our trading partners began to withdraw their gold deposits in the U.S., the amount of gold supporting the U.S. Dollar became untenably low. President Richard Nixon canceled the convertibility of dollars into gold, leading ultimately to a system of floating exchange rates.

As bad as it was, it could have been worse if the world wasn’t so connected by trade. More dollars were held by foreigners than by U.S. citizens. A gigantic amount of dollar-denominated debt was owed by foreigners to foreigners. This “euro-dollar” system meant that the world – even our enemies, the Soviets – had a vested interest in ensuring that the Dollar retained its place as the dominant reserve currency. Today, over $1 trillion of greenbacks are held by foreigners outside the United States, and over $12.8 trillion of debt denominated in dollars is owed by foreign non-bank entities. The winding down of this system will take a long time, even if our current adversaries wish it otherwise.

China’s currency, the Renminbi, is pegged at a particular exchange rate to the U.S. Dollar. In the past decade or so, there have been calls for China to liberalize its currency and allow the renminbi to float – that is, for the market to determine the number of renminbi it takes to equal a dollar, a euro, a pound, or yen. China has not yet fully opted to do this. This practice has confounded economists and investors alike over the years, who guessed, based upon opaque data from China, that if China were to float its currency that it would appreciate massively against the dollar, only to watch China devalue its own currency in dollar terms over the ensuing period.

The Saudis could sell their oil to China in Renminbi, but unless they were buying goods and services directly from China, they would have to exchange their Renminbi for other more useful currencies – Euros and Dollars. The dollar is used to price oil because it’s efficient. The U.S. is the largest consumer of oil – we consume 21% of the world’s oil. So, it’s convenient for sellers to price the commodity in the currency of the largest global customer. Most trading in commodities is not in physical stock but in derivatives contracts. Most of those contracts are denominated in U.S. dollars. While the second largest user of oil is China at 15%, because China’s currency is a substitute for a set number of dollars and because there are no derivatives settled in renminbi, it is unlikely that a small number of trades in alternative currency would derail the dominant place of the dollar in the oil trade. That same logic prevails for any number of other commodities.

For now, the efficiency of the dollar as a medium of exchange, the dominant status of the United States as the largest economy, and the interconnectedness of a system whose lifeblood is dollars should prevent any meaningful change to the current system. However, that dominance depends in the long run on global confidence in the soundness of our fiscal and monetary policy. At Concord Asset Management, we’re not particularly concerned about the dollar’s reserve status when making investment decisions.

Author

Gary Aiken, Chief Investment Officer

Gary has over 21 years of investment experience and holds an undergraduate degree in economics from the University of Maryland and an MBA from The George Washington University School of Business.

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Footnotes and Sources:

¹Neely, Christopher. Federal Reserve. “On Economy Blog” October 18, 2022

²Bank for International Settlements. Q4 2022

³U.S. Energy Information Administration

Weekly Market Insights – Monday, August 7, 2023

Stocks Raise White Flag to Bad News:

Stocks retreated last week as bond yields increased following the Treasury’s announcement indicating “a larger-than-expected funding need” and a downgrade in the federal government’s debt rating.

Over the last month, The Dow Jones Industrial Average returned 4.57%, while the S&P 500 returned 2.29%. The Nasdaq Composite Index returned 2.03%.

Stocks Struggle

Stocks struggled as investor sentiment turned cautious amid rising bond yields. Markets were rattled initially by news that the Treasury raised its borrowing requirement for the third quarter by more than a quarter of a trillion dollars and on news that the Bank of Japan announced it would allow bond yields to rise after years of capping them.

Rising yields continued to pressure stocks in the wake of a surprise rating downgrade of U.S. government debt by a major credit rating agency due to its belief in expected fiscal deterioration over the next three years.

Stocks rebounded Friday morning, rising on modest employment data only to reverse and add to the week’s losses.

Mixed Signals from the Labor Market

Fresh employment data last week gave some conflicting signals about the labor market. A new JOLTS (Job Openings and Turnover Survey) report showed a small decline in job openings and layoffs in June, leaving 1.6 job openings for each available worker.¹

Automated Data Processing’s (ADP) employment report reflected strong private sector hiring with a 324,000 increase in jobs, exceeding the consensus forecast of a 175,000 gain.²

The government’s monthly employment report saw a cooling in hiring as employers added 187,000 jobs in July. This was slower than seen in the first six months but enough to shave the unemployment rate from 3.6% to 3.5%.³

This Week: Key Economic Data

Source: Bloomberg Finance L.P.

This Week: Companies Reporting Earnings

Source: EarningsWhispers

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken
Chief Investment Officer
Concord Asset Management

—

Footnotes and Sources

¹CNBC, August 1, 2023

²CNBC, August 2, 2023

³The Wall Street Journal, August 4, 2023

Summer Ends on a Gloomy Note for Stocks:

Stocks suffered significant losses last week as rising bond yields and concerns about a possible government shutdown dampened investor sentiment. Technology stocks were hit especially hard, bearing the brunt of the retreat.

Over the last month, The Dow Jones Industrial Average returned –1.03%, while the S&P 500 returned –1.54%. The Nasdaq Composite Index returned –2.11%.

Stocks Decline

Investor sentiment took a decidedly negative turn last week when investors were caught off-guard by the Fed signaling another potential rate hike this year, upending hopes that the Fed might finish its current rate-hike cycle.

Stocks declined sharply following the Federal Open Market Committee (FOMC) announcement and continued to fall the following day as bond yields spiked. The 10-year Treasury yield hit 4.48% on Thursday, touching its highest point in more than 15 years.1

Stocks also reacted to news that the House of Representatives went into recess on Thursday, increasing the prospect of a government shutdown. The sell-off cooled on Friday, adding only incrementally to the week’s accumulated losses.

Fed Signals Another Rate Hike

This Week: Key Economic Data

This Week: Companies Reporting Earnings

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken Chief Investment Officer Concord Asset Management

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Stocks Hold Their Breath, Awaiting Fed’s Next Move:

Stocks closed last week with little change, as investors processed a combination of new economic data that presented a mixed picture.

Over the last month, The Dow Jones Industrial Average returned 0.58%, while the S&P 500 returned 2.06%. The Nasdaq Composite Index returned 3.17%.

Stocks Searching for Direction

However, sentiment quickly reversed on Friday due to declining consumer confidence, troubling news in the semiconductor space, and a labor strike at the nation’s major automakers, sending major averages to a mixed close for the week.

Inflation Progress Stalls

This Week: Key Economic Data

This Week: Companies Reporting Earnings

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken Chief Investment Officer Concord Asset Management

—

Fed Rate Hike Concerns and Rising Oil Prices Cast Shadow on Stocks:

Investor sentiment soured last week as concerns about the possibility of the Fed raising interest rates caused stocks to decline during a shortened holiday trading week.

Over the last month, The Dow Jones Industrial Average returned –1.53%, while the S&P 500 returned 0.38%. The Nasdaq Composite Index returned 1.82%.

Stocks Resume Their Decline

Oil Prices Spike

Last week, Saudi Arabia and Russia announced they would extend their oil production cuts to the end of the year. Investors had expected these cuts to be stretched to October, so the three-month extension surprised the markets.

The announcement sent oil prices higher on supply shortage worries in the coming winter months, with the West Texas Intermediate (WTI) oil price climbing to a 10-month high.2

Higher oil prices also sparked concerns that it would make the Fed’s inflation fight more difficult, potentially forcing the Fed to hike rates above market expectations.

This Week: Key Economic Data

This Week: Companies Reporting Earnings

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken Chief Investment Officer Concord Asset Management

—

Concord Asset Management invests client portfolios in a variety of different asset classes both directly and through exchange-traded funds (ETFs). We do not navigate by the stars. We have a framework for identifying attractive investments called “Relative Value.”

A Normal Yield Curve is Upward Sloping

Fed Policy is Restrictive

Author

Economic Softness Sparks Market Optimism:

Falling bond yields, spurred by weak economic data, helped lift stocks to weekly gains as investors sought higher returns in equities. This development brought relief to market participants and contributed to the overall positive performance of stocks last week.

Over the last month, The Dow Jones Industrial Average returned –1.88%, while the S&P 500 returned -0.23%. The Nasdaq Composite Index returned 0.79%.

Stocks Rise on Slowing Economy

It wasn’t all about bad news being viewed as good news, though. A series of solid earnings reports, an announcement by one mega-cap tech name introducing pricing for its AI tools, and fresh inflation data — in-line with market expectations–further boosted enthusiasm for stocks.

Labor Shows Signs of Cooling

Despite historic monetary tightening, the labor market has exhibited remarkable resilience, but last week’s employment data showed a cooling trend.

Finally, the government’s monthly employment report showed the number of nonfarm payroll gains continued to decelerate in August, while June and July estimates were revised lower by 110,000.3

This Week: Key Economic Data

This Week: Companies Reporting Earnings

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken Chief Investment Officer Concord Asset Management

—

Stocks Retreat as Powell’s Hawkish Talk Rattles Markets:

Last week, stock markets remained volatile, influenced by unpredictable bond yields and more headline news. However, markets ended the week on a positive note after Fed Chair Jerome Powell’s remarks regarding the monetary outlook.

Over the last month, The Dow Jones Industrial Average returned -2.31%, while the S&P 500 returned –2.66%. The Nasdaq Composite Index returned –4.17%.

Stocks Manage Gains

Stocks rallied on Monday on upbeat sentiment over the earnings release from a mega-cap semiconductor company scheduled for mid-week, only to see that momentum fizzle the following day on weak retail earnings and a credit downgrade of a handful of banks.

After some initial jitteriness, investors responded well to Powell’s comments, posting gains to close the week.

Powell Stands Firm

This Week: Key Economic Data

This Week: Companies Reporting Earnings

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Gary Aiken Chief Investment Officer Concord Asset Management

—

Markets Weather the Storm of Economic News and Indicators:

Last week, stocks continued their August decline as investor sentiment turned negative due to higher yields and disappointing economic data from China.

Over the last month, The Dow Jones Industrial Average returned -2.44%, while the S&P 500 returned -3.48%. The Nasdaq Composite Index returned –4.65%.

Stocks Wilt

Rising bond yields, driven primarily by strong economic data and the release of the minutes from July’s Federal Open Market Committee (FOMC) meeting that pointed toward Fed officials’ potential need to raise rates further, weighed on stocks throughout the week.

In a week of light trading typical of August, stocks were additionally buffeted by a string of economic data that painted a flailing economic recovery in China and warnings of potential downgrades of dozens of U.S. banks by Fitch, a credit-rating agency.

After the 10-year Treasury yield rose to its highest level since October 2022 on Thursday, yields eased on Friday, helping to arrest the week’s downward trend.1

Retail Sales Surprise

Consumer spending was higher in most categories, including bars and restaurants, grocery and hardware stores, and back-to-school items like books and clothing. Sales of autos and electronics fell, a possible consequence of higher borrowing costs.2

Stocks declined sharply following the Federal Open Market Committee (FOMC) announcement and continued to fall the following day as bond yields spiked. The 10-year Treasury yield hit 4.48% on Thursday, touching its highest point in more than 15 years.¹

Gary Aiken
Chief Investment Officer
Concord Asset Management

Gary Aiken
Chief Investment Officer
Concord Asset Management

The announcement sent oil prices higher on supply shortage worries in the coming winter months, with the West Texas Intermediate (WTI) oil price climbing to a 10-month high.²

Gary Aiken
Chief Investment Officer
Concord Asset Management

Finally, the government’s monthly employment report showed the number of nonfarm payroll gains continued to decelerate in August, while June and July estimates were revised lower by 110,000.³

Gary Aiken
Chief Investment Officer
Concord Asset Management

Gary Aiken
Chief Investment Officer
Concord Asset Management

After the 10-year Treasury yield rose to its highest level since October 2022 on Thursday, yields eased on Friday, helping to arrest the week’s downward trend.¹

Consumer spending was higher in most categories, including bars and restaurants, grocery and hardware stores, and back-to-school items like books and clothing. Sales of autos and electronics fell, a possible consequence of higher borrowing costs.²

Gary Aiken
Chief Investment Officer
Concord Asset Management

Producer prices painted a more mixed picture, coming in a bit higher than expected, rising 0.3% versus the expected 0.2% increase, though the year-over-year increase was just 0.8%. Core producer prices’ 12-month increase of 2.4% tied for the lowest since January 2021.²

Gary Aiken
Chief Investment Officer
Concord Asset Management