🧭 The Weekly Scoop

Hey friends, hope you enjoy this late summer weekend!

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

It’s hard to take a late August week in the markets too seriously. With fewer people at their desks, there’s room for a flash crash or surprise rally. However, a 1-2% week means everyone has the market on snooze until after Labor Day.

The two most significant things to pay attention to this week were Artificial Intelligence and interest rates. Anyone who’s used ChatGPT or played with some image generators can get excited (or fearful) about the potential for generative AI. But the big question is whether it’s excitement or tangible earning potential yet. Nvidia, which has positioned itself as the dominant manufacturer of computer processors capable of handling the massive loads of AI, seems to be the only company really making major money off it yet. Nvidia’s quarterly report was this week, blowing away very lofty expectations. So, there’s hope for AI.

The second most significant thing is interest rates. Interest rates have been rising all summer. The stock market doesn’t like higher rates for a lot of reasons. Higher rates make borrowing - mortgages, student loans, auto loans - much more expensive. That slows consumer spending (less revenue for companies). Higher borrowing costs for companies eat into profits, too. The stock market runs on corporate profits. Higher rates also make stocks less attractive. If you can get 5% on a savings account, the uncertainty of stock market growth isn’t quite as appealing as when your cash was earning nothing.

Overall, investors are just working through the same debate they’ve been having all year. Will high interest rates slow the economy into recession? Or is the economy too resilient that it will keep overheating and causing inflation? Will that inflation then force policymakers to raise rates? Will those higher rates then push us into recession?

When your job is to analyze every economic data point and make predictions, the dull periods where the economy is just doing fine can be the most annoying.

🐂 Reasons to be optimistic:

• Fewer workers got laid off again last week. The Labor Department reported initial unemployment claims dropped for the second week to 230,000, roughly in line with pre-pandemic averages. Employment is about as high as economists think possible, and there are still 1.6 available jobs for every unemployed person.

🐻 Reasons to be pessimistic:

• The economy slowed a bit in August. S&P Global’s PMI index, measuring manufacturing and service sector business activity, declined in August by the most in over nine months. Growth seems to be stagnating as new orders fell, and employment increased only slightly.

• Businesses aren’t investing in as much self-improvement. The Commerce Department reported a slowdown in equipment and technology spending in July. Orders for new aircraft tanked, and businesses invested in fewer computers. Purchases of core machinery rose slightly.

• Interest rates keep climbing, making debt more expensive. Confidence in the strength of the US economy and fears that policymakers may have to fight higher inflation pushed the 10-year US treasury bond yield to its highest rate since 2007 this week, 4.34%. Since the US government is considered a "riskless" borrower, the treasury bond is the baseline rate for most other borrowing. So, as treasury rates rise, other debt like mortgages grows more expensive.

• The most expensive mortgage rates in over 23 years have made a mess of the real estate market. The Mortgage Bankers Association reported the lowest mortgage activity in nearly three decades last week, with 30% fewer new home applications than a year ago. The average 30-year mortgage is 7.31%, up from 5.65% a year ago.

• Home sales have stalled, but prices keep climbing. The National Association of Realtors said the number of existing homes sold in July fell by 2.2% to a six-month low. Mortgage rates are higher than they have been in decades, so homeowners have opted to hang on to their cheaper rates. There are about half as many homes on the market as there were pre-pandemic. The limited supply of homes pushed median home prices up to $406,700 in July, 1.9% higher than a year ago.

• With high mortgage rates keeping homeowners on the sidelines, home buyers have been piling into new homes. The Commerce Department reported sales for newly constructed homes soared in July, up 32% from last year.

• High interest rates pose challenges for smaller banks as they need more cash flow to pay savings accounts. Credit ratings agencies have reduced their scores for several banks in recent weeks. S&P Global reduced its rating for Associated Banc-Corp, Valley National Bancorp, UMB Financial, Comerica Bank, and KeyCorp.

• Small businesses are struggling. The National Federation of Independent Business reported more than half of all small businesses think we’re already in a recession. [🤓] While that’s not great, the percentage is slightly lower than four months ago. Borrowing money remains the biggest concern for business owners. Policymakers’ rapid increase in interest rates has made loans significantly more expensive.

• American workers are demanding higher wages to meet higher living costs. The Federal Reserve's employment survey revealed a significant increase in the minimum salary people would accept to switch jobs, up 8% in the past year to $78,645. The average full-time salary offer is only $69,475, though that's up 14% over the past twelve months. Fewer people reported looking for a new job or expecting to.

• The Panama Canal's drying up. Historic drought and warm sea temperatures have forced operators of the vital Pacific-Atlantic Ocean shortcut to limit the size and weight of cargo ships. The restrictions have already delayed transports by weeks and sent shipping costs surging. Roughly 80% of global trade is carried by the ocean. Severe drought disruptions in the world's fifth-wettest country highlight growing climate concerns for businesses.

It’s not easy to tell how the US consumer is doing right now. Spending trends seem to be shifting from services and travel back to some products, but it really depends on the power of the brand. 

Click to dig in & vote your reaction, see how others feel

• Dick’s Sporting Goods says shoplifters are denting profits

• Macy’s warns shoppers are missing credit card payments

• Abercrombie & Fitch’s rebrand proves very successful

• Peloton keeps bleeding as it fights to recover

• Dollar Tree forced to improve workplace safety amidst severe violations

(These links only work for 24 hours while the story is live)

🏡 For your home

7.3% = Average 30-year mortgage rate

That’s up from 6.9% a month ago and up from 5.7% a year ago. _{Mortgage Bankers Association, 8/18/23}

$406,700 = Median existing home sales price

That’s down from $410K a month ago and up from $399K a year ago. _{National Association of Realtors, 7/31/23}

💼 For your work

230,000 = Layoffs Last Week (Initial jobless claims)

That’s down from 240,000 the week before and in line with pre-covid averages. _{Labor Dept., 8/18/23}

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% in June 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}

$3.84 = National Average Gas Price/Gallon

That’s up from $3.60 a month ago and down from $3.88 a year ago. _{AAA., 8/24/23}

💰For your savings

0.43% = Average interest banks pay on a savings account_{, FDIC, 8/21/23}

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

-4% past month, +6% past year, and +53% over 5 years. _{S&P 500 Index, 8/24/23}

4.24% = The yield on the 10-Year US Treasury Bond

Yields are -1% this past week, +9% this past month, and +36% over the past year. _{US Government Bonds, 8/24/23}

-3% = This past week’s price change for Bitcoin

-11% in the past month and +22% in the past year. _{Coinbase, 8/24/23}

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

-11% in the past month and -1% in the past year. _{Coinbase, 8/24/23}

For many of us, the word recession means global crisis. The last two recessions were the most severe economic disasters of the last half-century. In 2008, the global financial system collapsed. In 2020, the global economy was completely shut down.

Not every recession is a financial crisis. Recessions are a natural part of the economic cycle. The economy grows, slows, and contracts. Just like all squares are rectangles, but not all rectangles are squares. The same is true with recessions and financial crises. We're in unprecedented times, so it's hard to say what comes next, but economists aren't really talking about an impending economic collapse.

A recession can be defined as two quarters of less economic production (GDP) than the previous. That technically occurred in the first half of 2022, but no one has named that an official recession yet because unemployment was at historic lows. The whole situation is unusual.

Don’t get too hung up on the semantics. By most economic measures, the economy is doing well. If you think it feels like a recession, it might just be inequality. Big corporations and wealthy families can do well and support the overall economy, while small businesses and lower-income families struggle.