Jackson Hole and Beyond

Aug 28, 2023

By Jack Kraft, CFA, Investment Strategist
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U.S. equities finished last week mixed as investors weighed the wrapping up of earnings season and the conclusions of the U.S. Federal Reserve (Fed) annual symposium at Jackson Hole. The Nasdaq outperformed, gaining 2.3% on the week, while the S&P 500 added 0.8%. Investors were relieved as both indices broke a three-week losing streak. Elsewhere, the Dow bucked the uptrend, losing 0.5% on the week.

At the sector level, seven of the 11 S&P 500 sectors ended the week in positive territory with the biggest gains coming from the Technology and Consumer Discretionary groups. Mega tech seemed to be the winners last week with Tesla jumping more than 10%. Artificial intelligence was continuing to take over headlines with Nvidia reporting profits. The chipmaker beat estimates on the top and bottom line amid AI data center revenues tripling from this time last year. Shares reacted positively to the news and finished the week higher by about 6%. In other earnings, retailers offered hints that consumers may be facing challenges. Main themes included a worse-than-expected back to school shopping season and a higher demand for value and private-label products. Additionally, companies blamed “shrink,” also known as shoplifted goods, for pressured margins.

Investor sentiment was dampened amid growing concerns that 2024 earnings expectations need to be revised down. Bottom-up consensus is calling for an 11% growth in earnings per share for 2024. There is an argument that double-digit growth next year is a high hurdle for companies given the aging business cycle, restrictive monetary policy, dampened fiscal support and global growth drag from China. Analysts at JPMorgan are anticipating a wave of downgrades with consensus estimates for next year moving from $246 per share closer toward its forecast for $230/share.

Elsewhere, the Fed provided clues on future monetary policy at its yearly Jackson Hole symposium. As expected, Federal Reserve Chairman Jerome Powell offered no near-term policy signals. Powell reiterated that the economy would need to see below-trend growth and a softer labor market for elevated inflation to return to its 2% target level. The majority of policymakers seem to be in the “higher rates for longer” camp despite fed funds futures markets pricing in cuts as soon as May 2024. When it came to commentary surrounding additional rate hikes, Powell argued the Federal Open Market Committee should “proceed carefully.” This was a shift from prior comments acknowledging the risks of doing too much versus doing too little as fairly balanced, ultimately distancing himself from prior comments about the greater risk of under-tightening.

Investors are left speculating if the Fed has finished its tightening cycle. Many economists believe that July was the last hike of the cycle with growth continuing to slow into year-end. The reason behind this – given that there is lag between monetary policy and inflation data – suggests there is significant further drag left in the pipeline. However, fed futures disagree and are slightly leaning toward one more hike in November with a 55% probability.

Yields continued to climb higher last week with the 10-year and 30-year yield hitting the highest level since 2007 and 2011, respectively. Higher rates aren’t only pressuring equities but also the housing market with mortgage rates at a 23-year high and purchase applications hitting a 28-year low. In fact, the jump in rates has brought housing affordability to its lowest level since 1985.

Looking ahead to this week, investor focus will be on a few remaining companies expected to report earnings and some economic data. Headlining the economic calendar will be nonfarm payrolls on Friday, which is expected to show that the labor market added 165,000 jobs in August. Other employment data will be in focus with ADP Employment, the unemployment rate, and hourly wage data. ISM manufacturing also hits the tape Friday and is expected to tick up to 46.6 but remains in contraction territory. Elsewhere, the Fed will be looking closely at its preferred gauge for inflation with Personal Consumption Expenditures (PCE) index data coming out on Wednesday. Lastly, the S&P/Case-Shiller home price index will give homeowners an update on prices around the United States. Earnings will also be in focus with several big retailers (DG, BBY, LULU) and technology companies (CRM, AVGO, DELL) reporting profits and revenues.

None scheduled
9:00 AM S&P/Case-Shiller home price index (20 cities) June -1.70%
10:00 AM Job openings July 9.58 million
10:00 AM Consumer confidence Aug. 116.5 117
8:15 AM ADP employment Aug. 170,000 324,000
8:30 AM GDP (revision) Q2 2.40% 2.40%
8:30 AM Advanced U.S. trade balance in goods July -$88.8B
8:30 AM Advanced retail inventories July 0.70%
8:30 AM Advanced wholesale inventories July 0.50%
10:00 AM Pending home sales July -0.80% 0.30%
8:30 AM Initial jobless claims Aug. 26 235,000 230,000
8:30 AM Personal income (nominal) Aug. 0.30% 0.30%
8:30 AM Personal spending (nominal) Aug. 0.70% 0.50%
8:30 AM PCE index July 0.20%
8:30 AM Core PCE index July 0.20% 0.20%
8:30 AM PCE (year-over-year) 3.00%
8:30 AM Core PCE (year-over-year) 4.20% 4.10%
9:45 AM Chicago Business Barometer Aug. 44.2 42.8
10:00 AM
8:30 AM U.S. nonfarm payrolls Aug. 165,000 187,000
8:30 AM U.S. unemployment rate Aug. 3.50% 3.60%
8:30 AM U.S. hourly wages Aug. 0.30% 0.40%
8:30 AM Hourly wages year over year 4.40% 4.40%
10:00 AM ISM manufacturing Aug. 46.6 46.40%
10:00 AM Construction spending July 0.50% 0.50%


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