Whats goes up…

After a very positive rise in July, August appears to prove out the old adage. The continuing market index leader cooled down and the Nasdaq Composite fell 1.9% this week, ending Friday’s session with a 0.7% decline. It proved to be the tech-heavy index’s first two-week losing streak of the year. The Nasdaq has fallen in seven of the past nine trading days and is down 4.9% in August. That brought down 2023’s gains to a still-enviable and more than respectable + 30.4%.

On the flip side was the Dow Jones Industrial Average, which rose 0.6% this week and 0.3% on the day. The Dow is up for four of the past five weeks. Indicating that value-based stocks are rotating and beginning to catch up to the red-hot Nasdaq. The S&P 500 was somewhere in the middle. It fell 0.3% on the week and 0.1% on the day. The S&P 500 market benchmark is also down for two straight weeks, however, earnings continue to be positive.

Internationally, the FTSE 100 finished the week down .53%, and the Broad Markets MCSI-EAFE was off .67%. UK’s FTSE 100 fell on Friday in a broad-based selloff after data showing the British economy registered unexpected growth in the second quarter, raising speculation of more interest rate hikes from the Bank of England (BoE).

One other international item that caught investors’ attention was deflation in China. China’s National Bureau of Statistics reported that consumer prices fell 0.3% year to year in July, the first negative reading since February 2021. Producer prices have been falling since late last year, and tumbled 4.4% last month on an annualized basis. The situation is likely to have ripple effects. “China’s deflation, which reflects weak household demand as well as excess capacity in some parts of Chinese manufacturing, is likely to reverberate around the world,” said Eswar Prasad, an economics professor of trade policy at Cornell University and former China division chief at the International Monetary Fund.

But the effect on U.S. inflation likely will be limited, given that the U.S. consumer price index is weighted toward factors that generally are not heavily reliant on Chinese imports. Moreover, the share of U.S. goods from China has fallen in recent years. In fact, Mexico supplanted China as the top U.S. trading partner at the beginning of this year.

The big story, other than what is going on in Washington between indictments, congressional investigations and culture wars, was the producer price index report, which is one of the main indicators of inflation.

As Barrons reporter Conner Smith wrote: “Stocks mostly shrugged at the producer-price index, which rose 0.3% in July, compared to expectations for an increase of 0.2%. The University of Michigan’s consumer sentiment survey showed a dip, though inflation expectations were also down.” Meaning inflation is not going anywhere as the uptick plus the 4.9% increase in fuel and food prices, the thing that affects the average American, continue to put pressure on the family budget.

“The damage of the PPI data has been largely dismissed, as the element that moved the needle the most was the unusual category of investment management fees, which is not very threatening,” writes Navellier & Associates founder Louis Navellier. “Expectations for a September Fed increase remain unlikely and have been kicked down the road to late in the year, and only if inflation doesn’t continue to fall.”

On the jobs front, Unemployment will continue to grow, but not by as much as some economists once thought, likely increasing from 3.6% to 4% between now and the second quarter of 2024. Three months ago, economists expected unemployment to rise to 4.2% over the same period.  Projections were that the U.S. would add an average of 288,600 jobs per month in 2023, an increase from the 257,500 projections of three months ago. And although job growth is expected to drop substantially next year, (see, recession) the predicted average of 94,800 jobs added each month is still 38,700 more than the earlier forecast. (See, positive spin)

The economists seem to feel better about some economic conditions than they did in the past, but their hopes for inflation are not getting brighter. So where is the good news?

Fed officials are trying to lower the inflation rate to 2% without driving the economy into a recession. Three months ago, economists predicted that the core personal consumption expenditures index would reach 2% at the end of 2025. Now, the 2025 PCE expectation is 2.1%, a slight uptick from before.

Still, inflation will fall over the next year, the economists predict — a forecast largely in line with their previous projection.

The PCE (core personal consumption expenditures index), the Fed’s preferred measure of inflation, is projected to fall to 2.8% in the fourth quarter of this year. Core PCE, which excludes the volatile food and energy categories, will drop to 2.3% in the third quarter of 2024, they expect. Food and energy will rise.

The Energy Information Administration on Wednesday said U.S. crude inventories rose by 5.9 million barrels in the week ending Aug. 4, but gasoline inventories dropped by 2.7 million barrels and stocks of distillates, which include heating oil and diesel fuel, declined by 1.7 million barrels. Indicating the need to catch up as the Saudi’s continue to limit the world crude supply. This administration’s solution: Further limit US production and drilling. Guess what? get use to increasing fuel and food prices. Gains for natural gas, meanwhile, were tied to falling production and the possibility of worker strikes at some liquefied natural gas, or LNG, export plants in Australia, potentially creating supply shortages in the global LNG market, said Victoria Dircksen, commodity analyst at Schneider Electric, in a note.

These developments continue to confirm our opinions and as such we feel confident in our portfolio allocations.

Mike