Equities Fall with US Credit Downgrade and Mixed Jobs Report

Equities Fall with US Credit Downgrade and Mixed Jobs Report

Equity markets fell last week as the US government’s credit rating was downgraded and the recent jobs report brought mixed signals. Global equities (represented by the MSCI All Country World Index) were down -2.32%, and domestic stocks (represented by the S&P 500 Index) were down -2.26%.

Downgraded Rating

Credit rating agency Fitch was the spotlight of last week’s headlines as they downgraded the debt rating for the US from AAA to AA+ on Tuesday. Fiscal deterioration, “erosion of governance” as seen by standoffs around the debt ceiling, and a growing government debt burden were cited by Fitch for the downgrade. Rating agency S&P downgraded the US from AAA to AA+ back in 2011 which saw the S&P 500 decline 4.8% on the day of the announcement, however, the S&P 500 only fell by around 1.38% last Wednesday, the first trading day following Fitch’s downgrade.

Adding Jobs

The US economy added 187,000 nonfarm payrolls in July, similar to June’s revised number of 185,000 but missing estimates of around 200,000. While the first five months of 2023 averaged additions of 287,000 jobs per month, June and July’s numbers show a notable moderating trend in the labor market. The unemployment rate, however, slipped to 3.5%, down from 3.6% in June and around 50-year lows. Wage growth has been a concern of the Fed, and July’s report showed average hourly earnings grew 4.4% on a year-over-year basis, slightly higher than expectations and remaining unchanged from the previous month’s reading. While at a high level the moderating wage growth trend looks to have stalled, wage growth in many services sectors have moderated substantially from the rates coming into 2023 including IT, leisure and hospitality, and education and health services.

Demand

The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) reading for July of 46.4 was slightly lower than consensus estimates of 46.9 and marked the ninth consecutive monthly reading at contractionary levels (reading below 50). Demand continued to ease as the New Orders Index contracted, but at a slower rate, and the New Export Orders Index continued to fall deeper into contraction.

CPI

This week the Consumer Price Index (CPI) report is scheduled for Thursday. June’s CPI report showed inflation fall to its lowest annual rate since March 2021 of 3.0%. Earnings season continues as about 84% of S&P 500 companies have reported Q2 results. According to FactSet, 79% have beat earnings estimates which is higher than the five-year average of 77%. However, the blended earnings average for S&P 500 companies currently shows a decline of -5.2%, which would be the largest earnings decline since Q3 2020.

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.