By: Stash Graham
The stock market’s monthly winning streak ended as August bought selling pressure that caused losses across all three indices. The Dow Jones Industrial Average declined the most, losing -2.36% during the month. The S&P 500 and Nasdaq Composite lost -1.77% and -2.17%, respectively. While markets used a late rally to save the equity indices from a material loss, the bond market continued to underperform. The well-known bond ETF, iShares Investment Grade Fund (Ticker: LQD), was down -1% for the month and is in the red for the last 12 months. Recently, as interest rates on longer-dated U.S. Treasuries have continued to rise, longer-dated corporate bonds independent of quality have come under continued pressure. For example, healthcare company CVS Health is an investment-grade borrower. They issued a longer-dated bond in 2018, scheduled to mature in March 2048. Just nine months ago, this CVS bond was priced at around $980 per bond; a week ago, the bond was priced at $845 per bond. This fall in price is an unrealized loss of approximately -12%. A material fall in the bond price as the company generated more than $11 billion in free cash flow and maintained credit ratings. The price decline is strictly tied to the interest rate movements of the U.S. Treasuries. This bond is also a top-five position in the LQD. This position is an essential example of why we do not invest in bond funds if we can help it and focus on investing in individual bonds where we can quantify the risks being taken. Adding equities to the asset mix, the Vanguard 2025 Target Date fund (Ticker: VTTVX) was down more than -1.5% this month after a tough 2022 (down more than -15%). We mention VTTVX as this is the best benchmark for our investing strategy as they invest in stocks and bonds. About nine months ago, the target date fund increased its equity exposure relative to the debt exposure to maintain balance as equity losses were more significant than debt’s move lower.
Headline retail sales showed some strength month over month, but compared to inflation or their annual benchmark, they continue to show weakness. Credit card balances continue to increase to historical highs (per the New York Fed, credit card balances have grown to the highest nominal point since the bank tracked the metric starting in 2005). According to the St. Louis Federal Reserve, credit card borrowing has eclipsed $1 trillion. A recent J.D. Power survey found that more than half of credit card borrowers (51%) couldn’t pay off their entire balance each month, allowing interest to accrue as they let the debt rollover from one month to the next. According to the survey, this was the first time more Americans have allowed their credit balances to revolve than the portion of Americans who paid their bill in full. We wonder how the household can afford a low 20% APR when we know the average weekly earnings grew by +0.1% and aggregate labor income grew by +0.25% (month over month) in July. Separately, Bank of America reported a +36% year-over-year increase in 401(k) participants taking hardship withdrawals from their retirement accounts. The bank also noted that 2.5% of people are now borrowing against the assets in their retirement savings (up from 1.9% during the 1st quarter). It is important to note that hardship withdrawals do not protect you from early withdrawal penalties and taxes. Considering all the actions that have already taken place, does the average household seem healthy to you when a key factor driving the issues impacting these hardships (debt becoming more expensive and harder to get) is worsening? We have yet to mention that student loan repayments will start soon, taking cash away from households monthly.
Finally, we may have spent too much time this year discussing the labor market and our concerns that current data is likely overstating the perceived strength of the jobs market. However, after considering that the labor market is the strongest spoke of the economy right now, driving policy decisions, any weakness does bear monitoring. We highlight comments from ZipRecruiter CEO Ian Spiegel, who explained on his second-quarter earnings call, “Employers continue to respond to the enduring macroeconomic uncertainty with caution. The number of job openings and employers’ willingness to pay for those job openings has been declining significantly from the peaks of 2021 and 2022. This trend is consistent among both SMB and enterprise customers alike across multiple industries and geographies… the speed of this deceleration is particularly noteworthy, with July’s revenue being down approximately 31% year over year… it really accelerated towards the back end of July.” It is important to note that ZipRecruiter is the #1-rated job placement company for BOTH job seekers and companies, so the company has a great line of sight for both sides of the market. Based on this information, labor market data will likely be revised materially lower over the next couple of quarters, exposing a weaker economy than people believe we are now. The BLS’s initial jobs revision came in last week, and 358,000 jobs overstated private sector job creation. In summation, there are increasing odds that the Federal Reserve is making an error in monetary policy if they keep rates higher for longer, as the economy’s underlying strengths (the labor market) are already weakening.
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