We certainly endured a strange week in our financial markets. The housing conundrum continues, retail earnings and sentiment remain mixed, manufacturing has slowed more than expected, yet technology and the momentum stays in motion. Whew! That’s a mouthful to digest in many ways. To top it all off, Federal Reserve Chairman Powell made some strong statements to close out the week. Bear with me as this update may be a little longer than usual!
The housing dilemma continues to persist in some perplexing ways. While existing home sales fell in July to their lowest level since 2010, the median price was higher by 1.9% from July of last year. Supply continues to be the persistent problem. A housing shortage has pushed both competition and prices higher. The current pace of home sales represents a 3.3-month supply. A six-month supply is considered balanced between buyer and seller. Higher interest rates have done little to curtail the demand in many parts of the U.S. The willingness to “pay-up” where shortages exist has surprised many economists and the Fed for that matter. Consumers are being faced with a simple decision to make. Do the costs of higher interest rates outweigh the pace of rent increases. Until we see the scales tip to moderating rent levels, the decision to purchase remains clearer for now.
We had an abundance of retail earnings released again this week. We had companies such as Lowes, Ulta Beauty, Dollar Tree, Dicks Sporting Goods and others issue very mixed results. There does seem to be a growing trend or shift toward more conscience spending at discounters (similar to the difference we saw between Walmart and Target last week) which makes sense given the economic and inflation headwinds that still exist. One thing I did find disturbing were the comments made by the Dicks Sporting Goods CEO. She stated that “Organized retail crime and theft in general is an increasingly serious issue impacting many retailers. Based on the results from our most recent physical inventory cycle, the impact of theft on our shrink was meaningful to both our Q2 results and our go forward expectations for the balance of the year,” CEO Lauren Hobart said on a call with analysts. This is the first time I have heard these types of concerns mentioned in an earnings call. I know for certain, if these issues are not brought under control in some manner, the cost to purchase items on our end will only go up. Someone will “pay” and in the end it is typically the end consumer.
Another economic indicator released this week was the PMI Index (Purchasing Managers Index). You might ask yourself why this is important? I’m here to tell you! The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. Manufacturing slowed further in August to 47 from the July level of 49. Again, what does this mean and why does it matter? The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction while a reading at 50 indicates no change. The further away from 50, the greater the level of change. When we see this number decreasing as it has been, it indicates that manufacturing, overall, is slowing down. Data points such as this help shape the Federal Reserves course of action moving forward. While this alone can’t be used in a vacuum, it does illustrate that the work done in raising interest rates is having an impact.
On to the Fed and Chairman Powell. As we have been discussing recently, Chairman Powel spoke at the Jackson Hole Economic Symposium this morning and he certainly had a lot to say. To simplify things, I pulled out some of the significant bullet points to consider from his speech.
- Persistent signs of above-trend growth could put inflation progress at risk.
- Tighter bank credit standards are slowing the economy.
- Payroll growth has slowed significantly while hours worked are flat.
- We expect the labor market rebalancing to continue.
- Job openings have declined substantially without increasing unemployment.
- We are prepared to raise rates further if appropriate.
- Intend to hold policy at restrictive level until we are confident that inflation is coming down.
- Two months of good data are only the beginning.
I know this a lot to consider but trust me, I had to watch his speech then re-read the commentary several times. I think a simple summary is this; The moves they have made thus far are working but at a slower pace than anticipated. Target inflation levels remain at 2% and it may take more work on their part to get there. He left enough openings to continue raising rates if needed. I know I keep saying this, but TIME is the pivotal piece in all of this. Chairman Powell made it clear that more time is needed to see this through.
The wrench in all of this is the consumer. Growth in our economy has been persistent and above expectations. A lot of that growth is occurring on the technology side of things. Artificial intelligence, data and cloud storage and spending in those areas remains very strong. This is clearly bucking the trend that had been expected and has given pause to what the Federal Reserve may do next. On one hand, as investors, we have been appreciative of a stronger stock market this year. On the other hand, as long-term investors, we need to see more “breadth” in the recovery across other market sectors. That is the piece that has eluded us so far this year. I do believe this is achievable, however, that part will come as the Fed pivots to a true moderating stance. We are getting closer, but the finish line is just out of sight. In the meantime, we are being opportunistic and patient. For now, that is the best course of action. Hang in there, we are all in this together.
Have a great weekend!
https://www.cnbc.com/2023/08/22/home-sales-drop-again-in-july-as-supply-drops-again.html
https://www.cnbc.com/2023/08/22/dicks-sporting-goods-dks-earnings-q2-2023.html
https://www.investopedia.com/terms/p/pmi.asp
Christopher E. Wasson, CFP®
President
Mosaic Asset Partners, LLC
1122 Kenilworth Drive, Suite 310
Towson, MD 21204
410.821.0089 fax 410.821.5993
MosaicAssetPartners.com
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