Dumaine Investments Weekly Market Update – August 1, 2023
• US stocks have traded flat over the past week as investors digest the Fed’s July rate hike as well as a host of earnings and economic data. Earnings season is now in full gear with highly variable revenue and earnings results thus far. While it is true that the stock market rally appears to have broadened with a wider swath of sectors participating in the upside, we continue to have concerns related to both equity valuations and the potential for core inflation to remain stubbornly high.
• One particularly concerning measure of valuation is the equity risk premium, or the difference between the earnings yield of stocks and the yield on government bonds. This premium – effectively the reward one receives for bearing the additional risk associated with an equity investment – has fallen to its lowest level in 20 years, now at roughly 1.1 percentage points. So, on the one hand, we have seen a market rally that has been driven largely by speculation and a runup in prices that has not been matched by rising earnings as earnings in fact have declined for the last three quarters. On the other hand, profit margins are still near all-time highs, and there is little reason to expect a meaningful runup in earnings in the near future. While we recognize there are some signs that the economy could be headed for a ‘soft landing’ – or at least softer than originally anticipated – we remain strongly concerned about stock valuations.
• Another factor that cannot be ignored is the growing risk in China and other AsiaPac markets. China is showing signs of a significant economic slowdown after decades of supercharged growth. A much-anticipated post-pandemic recovery appears to have subsided, with data showing warning signs across the economy. There is concern that the government’s traditional tools for reversing course may not be viable options in this environment. And complicating the picture is the fact that there are major challenges across commercial and residential property sectors, sluggish consumer spending, and enormous levels of local debt.
• Over the next week, all eyes will be on company earnings and forthcoming economic data, notably non-farm payrolls and unemployment data on Friday, and inflation data next Thursday. We will have to see what the new data says, and how the market interprets it.
DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.