From the Trading Desk: New and Uncertain Times

In my previous post, I discussed the S&P 500 Index (SPX) and the potential that a new bull market may have commenced beginning June 7th. June and July were good months for stocks with the SPX finishing up 3.11% in July and the NASDAQ Composite closing July up over 4%. August has been an altogether different story. The NASDAQ composite is closing on its 3rd week of consecutive losses. Meta (META) is trading under its 50-day moving average, while Microsoft and Tesla trade below their respective 100-day moving averages. At the end of last week, the SPX had erased most of its gains since June. 

S&P 500 Index (SPX) 6-month daily chart

The US consumer, boosted by fiscal stimulus and a strong labor market, has had the financial capacity to fuel economic activity. Low unemployment, wage growth, and increased disposable income have translated into robust spending, further strengthening economic expansion. Yet cracks are starting to appear. The minutes from the Federal Reserve’s July meeting show the Federal Open Market Committee (FOMC) continues to believe the risk of persistent inflation remains elevated and the August 18th unemployment data signals a tight labor market. Yet as the US consumer continues to spend, big retailers are beginning to doubt their resilience. Walmart and Target beat profit estimates for Q2, yet despite beating estimates, they have observed consumers are showing less desire to purchase big ticket items as rising interest rates make financing too expensive. 

The consumer faces an additional upcoming challenge with the U.S. Department of Education’s COVID-19 relief for student loans ending this year. Student loan interest will resume starting on September 1st and payments are due in October adding more pressure to already stretched consumers. According to The Federal Reserve Bank of New York’s Center for Microeconomic Data quarterly report on Household debt and credit, credit card balances increased by $45 billion to over $1 trillion in the second quarter of 2023. Delinquency rates have also increased (normalized) to pre-pandemic levels. With the Fed determined to keep interest rates higher for longer, how long can consumers continue to spend?

The real estate market is interest rate dependent and with mortgage rates rising past 7% to a 40-year high, home ownership is becoming unaffordable except for the most affluent. With sellers wanting to keep their 3% mortgages and buyers not being able to afford 7%+ mortgage rates, the outlook is not very promising for homebuilders. This week’s homebuilder sentiment report showed a sharp decline in July. 

The Fed’s upcoming decision to hike or pause, as Fed Chair Jerome Powell insists, will be data dependent. However, the longer interest rates remain elevated the greater the risk to the economy and the capital markets. Navigating the increasing uncertainty will only prove more challenging as we wait for something to “break.”