Market Update: July 28th, 2023
US Fed Raises but Signals the End is Near.
Earlier this week, Jerome Powell and committee raised the US interest rates by another 25 bps. They signaled that they would review again for September and at that point they will be data-dependent on what comes between now and then. They also indicated they are no longer seeing a recession *knock on wood*.He should have probably left out that famous last words line.
GDP and where people are spending their money
The GDP numbers did come in better than expected for the US (2.4% vs. 1.8% expected),but there was a large drop in personal consumption growing $145Bin Q1 to growing $58B in Q2, led by a decline in spending on Cars, Clothing/Footwear, and Food Services/Accommodations. While the growth is nice people are buying and going out less than before and the growth was mostly led by more mandatory inflation-linked costs like Gasoline, Housing/Utilities, and Healthcare. This is not great news, in a consumer-driven economy, but the consumer remains optimistic overall as metrics say consumer confidence is high.
Magnificent 8 and their valuations
The top 8 companies (Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, NVIDIA, and Tesla continue to push higher and higher with valuations going above 30x next year’s earnings.
While these companies do deserve a higher valuation than the rest of the market, we are entering into an area of caution for these specific 8 companies. Even though just recently these companies lost about 35% in 2022 and 30% in the last 3 months of 2018.
Overall Economic Picture
The data this past month really has not been that bad. The economy is showing cracks but nothing that is immediately alarming, hence why the market has continued to trend upwards. The reality is people thought we would be knee-deep into a recession right now and we are not. The higher rates are slowly making their way through the system in the form of higher costs (mortgages, car loans, etc.) also these rates affect service costs (utilities, rental rates, production/manufacturing costs, etc.) which we are starting to take a bigger effect as discretionary spending comes down. Overall, job loss remains minimal, and adjustments can be made to manage payments. Things are tight right now, but not breaking now. As long as this remains the market can remain resilient also.
Justin, Konrad, and Merriel
More articles and information are available at www.lkwealth.ca
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research
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