Some Profit Taking

August 31, 2023

Coming into August the S&P 500 had risen for 5 consecutive months, and we wondered at the end of last month if it wasn’t time for a breather.  Let’s face it, the Federal Reserve is working hard to slow the economy and they seem to be succeeding. Interest rates have, in many cases, moved to the highest level in over 20 years and economic growth, while still moving forward, is slowing.  We are seeing more and more companies give cautious guidance and the bond market is predicting a recession is just around the corner.  However, despite all the signs, stock valuations have stretched to levels we typically see when the economy is accelerating, not when it is decelerating.  As a result, we were not surprised to see the August focus turn from AI enthusiasm to valuation concerns and the tech heavy NASDAQ that had been leading the rally saw its first 4 consecutive week decline this year.  The week before a 3-day weekend tends to be good for the market and a strong rally at month end helped erase some of the losses.  At the end of the month the S&P 500 had declined by 1.8% but is still 17.4% higher for the year, while the “equal weighted” S&P 500 index is up just 6.2% this year. The rate on the 10-year Treasury jumped to a 16 year high during the month and ended 3.8% higher for the month and up 5.5% for the year.  After a strong rally in July, we saw oil prices consolidate during August and end the month little changed, while gold prices were negatively impacted by a stronger dollar and moved lower.

We began the month on a Tuesday with the busiest week for earnings reports in Q2.  The big story of the week was the Fitch rating service downgrading U S Debt from AAA to AA+ which sent the market sharply lower.  The rating downgrade was the catalyst for an uptick in interest rates that weighed on stocks all week.  At the end of the week, we learned a fewer than expected 187,000 new jobs were created in July and the quarterly earnings report from bell weather Apple sent those shares down to a 2-month low.  At the end of the first 4 days of trading the S&P 500 had shed 2.4%. The first full week saw more quarterly earnings reports and a downgrade of some of the regional banks by the Moody’s rating service.  The highly anticipated Consumer Price Index report showed inflation ticked up in July for the first time in a year, but the uptick was less than feared and was greeted with a relief rally.  The first full week ended with the S&P 500 giving up another .3%.  The market continued to fall during the second full week after the Fitch rating service said they may have to downgrade more banks and the minutes from the most recent Federal Reserve meeting suggested additional interest rate increases may be needed.  The S&P 500 failed to hold technical support at 4400 and the week ended at a 2-month low, but that turned out to be the low for the month. The third full week saw a resurgence in tech stocks that help offset a rise in interest rates to the highest level in 16 years.  The top performing stock in the S&P 500 this year, Nvidia, reported another blowout quarter that saw those shares move to a new all-time high and the S&P 500 closed the week .8% higher.  The week before a 3-day weekend is historically good for stocks and this year was no exception.  A decline in interest rates helped lead a rally in technology names that erased the majority of the 5% loss we saw earlier in the month.

September is historically the worst month of the year for stocks, with an average loss of 1% and the likelihood of a positive close only 44%.  However, over the last 70 years if the S&P 500 is up more than 15% at the end of August (like this year) and August was a down month (like this year), September has closed higher 6 of 7 times.  On a historical basis valuations continue to be 60% above historic norms and with many companies lowering guidance it does not appear to be the environment where one would expect a strong rally.  In addition, the Federal Reserve has made it very clear that higher interest rates may be needed to slow the economy further.  We have maintained our core position which has allowed us to participate in this year’s rally, but we continue to have higher than normal defensive positions that we will maintain.

If you know someone who would be interested in learning more about Greenberg Financial Group, please contact us at 520-544-4909, or visit our website at www.greenbergfinancial.com. As always, the key to successful investing is to have a portfolio that is consistent with your investment objectives and risk tolerance. We invite you to listen to our weekly Money Matters radio show which airs every Sunday Morning from 8:00 AM to 10:00 AM on KNST AM 790.  You can also listen to us on iHeart radio, follow us on Twitter @gbergfinancial or on Facebook under Greenberg Financial Group.  Previous radio shows are available by going to www.iheart.com or using the iHeart app and typing Money Matters with Dean Greenberg.