August 2023 Market Update

At the August Jackson Hole Meeting, Federal Reserve Chairman, Jerome Powell once again reminded investors of the Federal Reserve’s commitment to push inflation back down to the 2% target and restore price stability.

In our view market participants are beginning to catch on to the message Chairman Powell has been delivering. The way to fix the economy in the long run is through higher real interest rates. Chairman Powell has stated that the Fed is in fact aiming for higher real interest rates. As the Feds interest rate hikes take effect, real interest rates rise at the onset of disinflation while nominal yields remain anchored to restrictive rate Fed policy and expected inflation rates decline. Higher real interest rates reward U.S. bondholders and encourage investment while applying pressure to valuations of risk assets such as stocks and real estate and creating competition between various asset classes for capital investment.

On the economic front, the Chicago PMi, a highly correlated indicator to S&P500 earnings strength recorded at 42.8 vs an expectation of 43 for the month of July. Since April, the Chicago PMi has fallen from 48.6 to 40.4 in May, bounced up to 41.5 in June and bounced again to 42.8 in July. For the month of July, the ISM manufacturing data recorded yet another miss of expectations and remained in contraction territory at a level of 46.4, up from 46 reported in June, as stated from our July Market Update, https://www.macrovex.com/post/july-2023-market-update , “it would not shock us to see an unsustainable very short-term bounce in ISM manufacturing and Chicago PMI data. It is in our view that any increase in commodities, oil prices and inflation expectations will likely negatively impact retail sales and total business sales further and ultimately lead to a harder landing for the consumer and the overall economy.” As this nuance with economic data plays out, we feel investors should use the euphoric time to position risk for the future.

As real interest rates rise, and lending tightens, the economy and asset prices experience more downward pressure. But as a result, bonds yields begin delivering a real positive rate of return. For example, the 5-year nominal interest rate is currently 4.27% and the 5-year breakeven inflation rate is 2.1%. The difference is a positive 5-year real interest rate of 2.17%. In our view the bond market is beginning to show signs of bottoming. US 30-year and 2-year yields at 4.45% and 5.01% appear a bit toppy. We feel U.S. Treasuries across the yield curve are beginning to look attractive, present real positive rates of return and demonstrate value creation in the event of recession.

The chart above depicts the 30-year bond price (green) and the ratio of core CPi to 30-year bond price (blue)

with the macd momentum indicator at the bottom.

The chart above depicts the 2-year bond yield with the macd momentum indicator at the bottom.

We do not recommend chasing the S&P500 index here at 4495. We understand the allure of owning and chasing stocks seems much more exciting than accepting the 4.50%-5.50% investors can earn with the federal funds rate at 5.25%-5.50%. There will be an event or a catalyst that will shock the system. Whether it is the banking system or commercial real estate or something else, when it happens, the valuation readjustment will be fast. Manage your risk and prepare your portfolio to endure a recession.

The chart above depicts the relationship between Federal Funds Rate (red) and the S&P 500 (blue).

With the S&P 500 trading around 4495, at approximately 22.2x earnings, we continue to believe investors will be rewarded by being positioned defensive, risk off and in cash, money market funds, T-bills, extending fixed income allocation from 0-5-year to 0–30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re steepening and select low duration equities.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice