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Stock Market This Week
Stock Market This Week – 08/05/23
Despite better-than-expected earnings from many companies in the past two weeks, the stock market struggled. The unexpected rating cut by Fitch buffeted equities. The rating agency lowered the United States’ sovereign credit rating from AAA to AA+ because of the debt standoff. This action set U.S. Treasury bond yields on a wild ride. However, the markets largely shrugged off the cut, and Fitch was subject to intense criticism. Warren Buffett stated, “There are some things people shouldn’t worry about,” and continued to buy Treasuries bills and bonds as usual. His investment vehicle, Berkshire Hathaway, carries over $100 billion cash and typically purchases $10 billion of 3-month of 6-month bills each Monday.
In the meantime, gas prices are ticking up because of the summer driving season and cuts by OPEC+ oil producers. However, I wonder if the price increases will hold after summer. In the meantime, the U.S. economy continues to chug along. After years of decline, the labor force expanded by 3.1 million in the past year or 2%, which has not occurred since the dot-com boom. The exact opposite of what economists predicted occurred, the U.S. did not enter a recession with mass layoffs. Moreover, employment is up.
Some demographic groups have benefitted immensely because of climbing employment in construction, healthcare, social assistance, and government. Although perceptions about the economy are poor, the reality is more complicated because, according to the job satisfaction survey, 62% are satisfied, the highest in 36 years. Perhaps people are doing jobs that better fit their interests, and prefer hybrid work. Furthermore, the unemployment rate remains at 3.6%, and jobs are plentiful. That said, the debt-to-income ratio has risen in many states, possibly explaining the negative feelings about the economy.
Stock Market Overview
As shown by data from Stock Rover*, the stock market performed poorly this week. All the main markets and indices declined. The Nasdaq did the worst, followed by the S&P 500 Index, Russell 2000, and the Dow Jones Industrial Average (DJIA).
Ten of the 11 sectors had gained this week. Energy, Consumer Cyclical, and Financial Services were the top three sectors for the week. But the Communication Services, Technology, and Utilities sectors performed worst.
Oil prices rose to over $82+ per barrel on supply concerns. The VIX dropped almost 17% but is still below the long-term average. Gold is nearing $2,000 per ounce.
The Nasdaq is performing the best for the year, followed by the S&P 500 Index, the Russell 2000, and the Dow 30. The Nasdaq is in the bull market territory, and the S&P 500 is close. In addition, 9 of the 11 sectors are up year-to-date. The three best-performing sectors are Technology, Communication Services, and Consumer Cyclical. But the worst-performing sectors are Energy, Healthcare, and Utilities.
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Stock Market Valuation This Week
The S&P 500 Index trades at a price-to-earnings ratio of 25.56X, and the Schiller P/E Ratio is about 30.89X. These multiples are based on trailing twelve months (TTM) earnings.
The long-term means of these two ratios are approximately 16X and 17X, respectively.
The market is still overvalued despite the recent correction and a bear market and rebound. Earnings multiples of more than 30X are overvalued based on historical data.
Economic News This Week
Provided by Stock Rover*.
Manufacturing PMI
The ISM® (Institute for Supply Management®) Manufacturing PMI® reported at 46.4% for July, as business activity increased by 0.4 percentage points from the previous month. A value below 50% is indicative of a shrinking economy. This marks the ninth consecutive month in contraction territory after 30 months of growth. “The U.S. manufacturing sector shrank again, but the uptick in the PMI® indicates a marginally slower rate of contraction. The July composite index reading reflects companies continuing to manage outputs down as order softness continues, ” said Timothy Fiore, the ISM® Manufacturing Business Survey Committee chairman. Of the six largest manufacturing industries, only petroleum & coal products recorded growth in July. The forward-looking new orders sub-index contracted for the 11th consecutive month, increasing 1.7 percentage points and improving to 47.3%.
The Prices Index, which measures what companies pay for raw materials and other supplies, showed a slower rate of price decreases, up 0.8 percentage points to 42.6%. This after a dramatic fall into contraction (or “decreasing”) territory in May after one month of expansion. The Employment Index decreased by 3.7 percentage points to 44.4%, contracting for a second month after two months of growth preceded by two months of contraction. This is its lowest reading since July 2020’s 43.7%. The Backlog of Orders Index increased 4.1 percentage points to 42.8% and has now contracted for the tenth consecutive month following 27 months of expansion.
PMI Composite Index
S&P Global reported that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 52.0 in July from 53.2 in June. While it is the lowest reading since March 2023, it marks the sixth straight month above 50, indicating growth in the private sector. While manufacturers moved out of contraction territory, overall growth was reduced by a slower expansion in services. Inflationary pressures remained historically elevated in July, as service providers were challenged by increased input costs and output charges. Manufacturing did see a rise in employment, although the employment growth rate was somewhat muted as pressure on manufacturing capacity diminished.
The S&P Global US Services PMI Business Activity Index dropped to 52.3 from 54.4; the growth rate was the softest since February 2023. Greater output was attributed to a sustained increase in new orders and continued demand from existing customers. Chris Williamson, Chief Business Economist at S&P Global, commented, “With the weakening service sector expansion accompanied by a near-stalled manufacturing sector, the overall message from the surveys is that economic growth weakened at the start of the third quarter, cooling to an annualized rate of around 1.5%.”
Job Growth
The U.S. Bureau of Labor Statistics reported 187,000 jobs were added as the unemployment rate dropped to 3.5% in July from 3.6% the previous month. May and June’s employment readings were revised for a combined (-49,000) jobs. The number of unemployed workers was little changed at 5.8 million. Health care added (+63,000) jobs, followed by social assistance (+24,000), financial activities (+19,000), wholesale trade (+18,000), and leisure and hospitality (+17,000). Employment in professional and business services declined (-8,000).
Among the unemployed, the number of permanent job losers decreased (-121,000) to 1.37M, while the number of reentrants to the labor force increased (+108,000) to 1.85M. The labor force participation rate was 62.6% for the fifth consecutive month. Average hourly earnings increased by 0.4% in July. At $33.74, average hourly earnings are up 4.4% from a year ago.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
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