Pause and Listen

Diversification and nimbleness are necessary ingredients for any investor as trends change from week to week. The S&P retracted -2.27%, NASDAQ declined -2.85%, and DOW shed -1.11%. This reversal of strong market performance came with the release of mega cap earnings and investors wondering if the “pay any” valuation method could be maintained. Tech companies and consumer discretionary companies saw weakness, while GDP-driven industrial and equipment companies found buyers. Large, active investors, like Bill Ackman, announced their short (betting against) treasury positions, which partially drove higher interest rates and the bond Agg being down -0.6%. In alternatives, the dollar continued showing signs of weakness, and gold rose 0.8%. Oil, specifically WTI, had its sixth week of gains, adding +2.8% to its price.

Big economic and credit news came in the form of a downgrade of US Credit by Fitch from the best rating of AAA to AA+ and leaving only a few countries at the prestigious AAA rating. There are three major credit rating agencies: S&P, Moody, and Fitch, and Fitch is a distant third to the others. Credit rating agencies analyze corporate, municipal, and sovereign (national) debt to give investors a benchmark for likelihood of default. While each agency has their own methodologies, they are usually fairly comparable. In 2011, S&P downgraded the US from AAA to AA+, but Moody maintained its AAA rating of the US. The recent Fitch decision obviously upset several in government, including US Treasury Secretary Janet Yellen (previously Chair of the Federal Reserve), who stated the rating change was “unwarranted.” Fitch defended the decision citing the polarized political environment, debt ceiling debates, increased interest burden, and fiscal risks in the coming years. In practice, operators are still very comfortable with treasuries and most see this downgrade as having very minimal impact.

In other economic news, most releases were very close to estimates and led to no surprise upside/downside in markets, with the exception of JOLTS, an employment report, which showed less job openings than previously anticipated. JPMorgan and Bank of America joined the soft-landing narrative and updated their year-end outlook to reflect less downside chances. 84% of large-cap companies have reported earnings this season so far, and, while year-over-year earnings were on the decline (-5.2%), most companies have beat estimates. This week, investors will try to keep the momentum going with the big releases of consumer credit, CPI, and PPI later in the week.

In geopolitical events, we are seeing political instability in some West African nations, as tensions between the United States and Russia continue over the war in Ukraine. Niger is 10 days into a military coup and has seen tensions escalate, as the Sunday deadline to return power to President Mohamed Bazoum passed without action. In the war in Ukraine, both sides have ramped up missile and drone strikes, with Ukraine striking a Russian oil tanker and warship, while Russia launched 70 missiles and drones at Ukrainian cities in retaliation.

The market continues to show signs of rebuilding a foundation, and this was a week of reassessment and pause before what we believe will be further growth. Like in life, it is important to keep our ears to the ground during times of market pause. “In the quiet God speaks. Much is accomplished in the pauses of life. God renews our strength in those waiting times” (Isaiah 40:31). As we await more and more positive outlooks, we’ll be listening intently!

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