Marketline Monthly – August 2023
We are moving into a more volatile season for stocks, namely the September/October period. The upcoming quarter will be the next to last earnings season of the fiscal year for most companies, and analysts’ 2023 estimates ride heavily on what happens during that three-month period. ‘Tis the season for downgrades, if analysts have been overly optimistic – which is often the case. August was a warm-up for Fall, with indices falling slightly across the board. The Dow, S&P, and Nasdaq clustered around the -2% area. Overseas, things were both a little worse and a little better. Mexico and Europe each declined more than 3%, but Canada – perhaps owing to stronger oil prices of late – was off only 1.6%.
Once again in 2023, while the “market” is up, returns to technology have been substantial – in the +40% area – while nearly everything else languishes. Utilities, in fact, are down about 13% this year. Financials are flat, and health care is off about 3%. All three of these sectors face headwinds: rising interest rates in the case of financials and utilities, and price pressures in the healthcare arena. These results contradict what analysts were saying through 2022, which was that technology was done as an investment because higher interest rates would ruin the companies’ valuations; that was true for most of 2022, but it has not been true since, and if anything, rates are even higher than they were back then. Looking forward, the one fly in the ointment in the tech sector is the US’s cold war with China, which seems to be spurring the latter to leapfrog into more competitive products than Westerners were counting on. China is very competent in the EV segment and has lately brought forth a 5G-like chip in a new phone that is substantially competitive with Apple’s products. While we doubt the US will lose its tech edge soon, the shine could come off the stocks if competition becomes fiercer.
This month, the yield curve did something new: it pivoted upward on the long end, while remaining steady in the short end. The pivot point was at about five years. The short end is hovering at 5.38% – same as in July – but the long bond traveled up to 4.21%, an increase of twenty basis points (0.2%). Rising rates mean that bond prices fall, so after the five-year maturity mark, returns began to shift in the negative direction in August.
This shift in the curve is notable. Historically, this slight steepening out in the long end has predicted a new direction for the Fed: either it stands pat, or it actually begins to cut rates. Interestingly, too, it is at this point that a recession – if it’s going to show up at all – appears. Now, I don’t mean in the next four minutes – but sometime over the next few months.
Sector news hasn’t changed much this month. My new complaint about the municipal market is that bid/ask spreads – the difference between what we pay to buy a bond and what we get when we sell it – are wide. That makes transactions expensive. Muni bid/asks are typically wider than most any other bond we deal in, but lately it’s become almost intolerable. In some cases, we’ve used Treasuries rather than munis – the income is state tax exempt and trading costs are much lower.
Corporate bonds remain substantially attractive. We have purchased another new name or two and will continue to pursue this segment more intensively than the muni area for the time being.
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Marketline Monthly is produced by Cascade Investment Advisors, Inc. We specialize in value investing for individuals. We apply our approach across markets, looking for low-priced securities that offer above-average potential. We use imagination and hard work to bring performance and personal service to our clients. Phone 503.703.3622 (Michelle); our website is www.cascadeinvestors.com. A full list of securities we invest in is available on request; mention of specific securities is not investment advice; such investments may or may not be profitable. Index returns quoted are price only.