🧭 The Weekly Scoop

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Here’s what you need to know this week.…

We’re in the depths of summer here in New York, and portfolio managers have left their cubicles behind for seaside villas and overpriced lobster rolls. August is a quiet month on Wall Street. It’s easy to think of the market as an autonomous machine, but humans genuinely do have an impact. With fewer traders at their desks, the market becomes a sleeping bear. It can stay boring until it gets a good poke. Then, who knows?

This week in the market was a little dull - no poking of the bear. We received more confirmation of the current narrative: the economy should be able to avoid a recession, but there’s nothing to get too excited about.

We heard the last big batch of corporate second-quarter financial reports this week, and America’s biggest companies are doing fine - better than expected. Profits are down about 5% from last year's peak but slightly higher than last quarter and projected to increase from here.

Jobs are plentiful, and business activity has cooled off enough that the worker shortage red alert has been cleared. Companies still need more workers than this country can currently provide. That’s giving workers more power to demand higher salaries, and wages are catching up to living costs. So that’s good.

This week's inflation report was a nice, yet boring, confirmation of the normalization trend in living costs. Some stuff is getting cheaper, but mostly prices are back to rising at an inconspicuous speed. [🤓] Ironically, the positive economic outlook has started pushing up oil prices, creating challenges for consumers.

Next week, we get a better look at the state of the consumer - the most important component of the economy. Our spending powers everything. We’ll hear updates from big retailers like Home Depot, Walmart, and Target, along with overall consumer spending data. As the pandemic savings surplus continues to dwindle, gas prices rise, student loans restart, and borrowing stays expensive, it will be critical to see if consumers can keep the buying momentum going. Wages are finally catching up. Hopefully quickly enough.

🐂 Reasons to be optimistic:

• Living costs aren’t rising as quickly anymore. The Bureau of Labor Statistics’ Consumer Price Index rose 0.2% in July, slightly lower than the rise in June. [🤓] The average cost of stuff we spend money on is roughly 3.2% higher than it was a year ago. These numbers might also be overstating reality. Rising rent and shelter costs were 90% of the CPI increase in July, but government shelter cost statistics are always a little stale and funky. More real-time indicators have shown home prices rising much more slowly or decreasing in many areas.

• It’s starting to get a little cheaper to get around. Shrinking airfares, public transportation costs, and vehicle price tags were some of the most significant negative contributors to the CPI last month. Groceries got a little more expensive. Notably, prices for meat and dairy products jumped 0.5% in July. Given the uncertainty of weather and agriculture, food prices are typically more volatile.

• Companies are still hiring, and unemployment is at record lows. The Labor Department’s July jobs report indicated the unemployment rate fell to 3.5%, one of the lowest levels in over fifty years. Overall, hiring is still in-line with pre-pandemic levels, picking up in services sectors. Healthcare and finance companies ramped up onboarding in July. Travel and leisure industry hiring has slowed significantly from the surge earlier in the year.

• Wages are finally catching up to rising living costs. The Labor Department reported average hourly earnings rose 0.4% in July, marking a 4.4% increase over the past twelve months. Living costs rose only 0.2% in July, and are up only 3.2% over the past year. Over the past two years, our incomes have mostly lost purchasing power.

• There are still a lot more unfilled job openings than usual. The Labor Department’s Job Openings and Labor Turnover Summary indicated companies had more than 9.5M unfilled positions at the end of June. That’s down from the peak of 12M last March but still well above the ~7M average before the pandemic. There are still nearly two open positions for every unemployed person.

• Institutional investors have turned more optimistic about the market. Hedge fund short sellers [🤓] have scrambled this summer to close their bets against the market. Goldman Sachs reported the highest volume of short covering in seven years. US and Canadian investors have already lost over $175B betting the market would fall this year, according to S3 Partners.

• Corporate profits have been mostly better than expected. We’re most of the way through second quarter corporate financial updates, and so far, about 80% have reported higher profit than investors projected. Overall, corporate profits are 5% lower than a year ago, but earnings are projected to grow in the next two quarters, according to Factset estimates.

🐻 Reasons to be pessimistic:

• Layoffs jumped last week but overall remain pretty low. The Labor Department reported initial unemployment claims rose to 248,000 last week, far more than economists expected. That’s a little higher than the range in 2019 but not problematic yet. US employment is still near record highs.

• People are staying out of the real estate market, given the expensive mortgage rates and low affordability. A new report from Fannie Mae revealed 82% of US consumers think it’s a bad time to buy a home, the highest percentage on record.

• Mortgage rates keep rising, deterring home buyers. The Mortgage Bankers Association reported applications to purchase a home plunged 3% last week, down 27% from a year ago. The average 30-year fixed-rate mortgage rose to 7.1%. The rate on Federal Housing Administration loans, meant to be more affordable for first-time or lower-income borrowers, hit 7%, the highest in over two decades.

• Sellers are also staying out of the market, hoping to hang on to their cheaper mortgage rates. Many people refinanced to lower rates over the past few years. Mortgage data provider Black Knight said 39 million US homes have a mortgage rate below 4.4%.

• Higher interest rates will likely make things harder for smaller banks. Financial ratings agency Moody’s sent out a warning about the health of regional banks, lowering its scores for ten smaller banks like M&T Bank, Pinnacle Financial, BOK Financial, and Webster Financial. This comes as no major surprise after the collapse of multiple banks in March. Moody’s said the US banking system is still strong overall, but these smaller banks will likely find it more challenging to make money as they pay out higher interest on savings accounts and compete for deposits.

🏡 For your home

7.1% = Average 30-year mortgage rate

That’s up from 6.9% a month ago and up from 5.5% a year ago. _{Mortgage Bankers Association, 8/4/23}

$410,200 = Median existing home sales price

That’s up from $396K a month ago and down from $414K a year ago. _{National Association of Realtors, 6/30/23}

💼 For your work

248,000 = Layoffs Last Week (Initial jobless claims)

That’s up from 227,000 the week before and slightly above pre-covid averages. _{Labor Dept., 8/4/23}

187,000 = New jobs added in July

That’s up from 185,000 in June and in line with pre-covid averages. _{Labor Dept., 7/31/23}

3.5% = Unemployment rate

That’s down from 3.6% the month before and still near the lowest rate in 50+ years. _{Labor Dept., 7/31/23}

9.6M = Available jobs

That’s little changed from the month before and well above pre-covid averages of ~7M. _{Labor Dept., 6/30/23}

Who’s hiring: Healthcare and government organizations

Who’s firing: Transportation and business services

👜 For your wallet

3.2% = Cost of living increase (1-Year Inflation)

Living costs are 0.2% higher than the month before. Normal inflation sees prices rise by 0% to 0.2% per month, 1-2% per year. _{Bureau of Labor Statistics, 7/31/23}

3.6% = Groceries cost increase (1-Year inflation)

Groceries are 0.3% more expensive than they were a month ago. _{Bureau of Labor Statistics, 7/31/23}

$3.83 = National Average Gas Price/Gallon

That’s up from $3.54 a month ago and down from $4.01 a year ago. _{AAA., 8/10/23}

💰For your savings

0.42% = Average interest banks pay on a savings account_{, FDIC, 7/17/23}

5.50% = Interest rate banks earn on their savings accounts_{, Federal Reserve, 7/26/23}

The Federal Reserve has raised baseline interest rates from 0% to 5.50% in the past year. Make sure your bank is paying you higher interest on your savings.

💸For your investments

-1% = This past week’s change in the US Stock Market

+1% past month, +7% past year, and +56% over 5 years. _{S&P 500 Index, 8/10/23}

4.11% = The yield on the 10-Year US Treasury Bond

Yields are -2% this past week, +3% this past month, and +47% over the past year. _{US Government Bonds, 8/10/23}

+1% = This past week’s price change for Bitcoin

-3% in the past month and +23% in the past year. _{Coinbase, 8/10/23}

+1% = This past week’s price change for Ethereum

-2% in the past month and -1% in the past year. _{Coinbase, 8/10/23}

The Consumer Price Index (CPI) is one of the main ways economists track inflation. Inflation is the rate at which things get more expensive. The CPI looks at a set basket of stuff your average consumer spends money on and tracks how much it costs each month. The rate of change is inflation.

One important thing to know: inflation is most often quoted as an annual number, like “inflation rose to 3.2% in July,” but the annual number might not always be the best reference in unusual times like the past two years. If we’re trying to understand whether living costs are still surging, the monthly rates of change are most helpful. If prices rose 0.18% from May to June and 0.17% from June to July, inflation actually declined, even if the July-22 to July-23 change is slightly higher than the June-22 to June-23 change. The annual number helps us remember the pain we’ve experienced, but monthly numbers help us understand what’s happening today.

Prices rarely go down. It's normal for things to get more expensive. You'll never be able to buy a Coke for a quarter again, but that's ok. Low inflation (~1-2% per year, 0.0-0.2% per month) is standard and almost unnoticeable. High inflation, like we saw last year, with prices of essential goods going up nearly 7-10% per year, is a problem. It's unmanageable, especially if our incomes aren't rising in tandem. Low inflation, where incomes keep up or outpace rising living costs, is the goal for economic policy, not zero or negative inflation.

Selling a stock short, often called shorting, means betting a stock's price will fall.

Logistically, a short seller will borrow shares of a company's stock from a third-party investor or financial institution at the current price and wait for the price to fall. If the stock price drops, the short seller will buy the same quantity of stock at the lower price and use those shares to pay back the third party. They basically buy low and sell high but reverse the order by borrowing the shares upfront.

Hedge funds, which are institutional investment managers, use short selling to hedge their bets. They bet that some stocks will go up while also betting some might go down to limit the swings in their portfolio.

Certain investment firms adopt short selling as their primary strategy and focus on uncovering hidden problems at particular companies. They produce research reports of their investigations that might spur a drop in the stock price so they can profit.