The Monthly Mosaic | August 2023


Right now the economy's mix held up by a couple of strong points, notably in the consumer, in the labor market, by and large, has been holding on strong enough, although it's slowing the consumer spending, we just saw pretty good retail sales number here. And for the July data in August, still looks like it's holding up relatively well. So by and large economy, we've mixed consumer spending a lot, holding the overall services side up a lot of travel and hospitality. But the good side, we're seeing a lot more slipping. So when you look at more on the manufacturing data, that's a lot more challenge. And I think that's just a, you know, a circumstance we've gone through because of the pandemic and everyone buying those goods when they're at home. That's waning, but the service side continues to hold it up. And overall, the economy continues to, I would say, Hold on, a little bit stronger than a lot expected here at this point, and with some pretty good estimates for third quarter GDP growth popping up there. But by and large, we are seeing a slowing trend across the entirety of the economy.

Housing remains quite strong, especially in the context of mortgage rates, you know, we've moved up to about a 30-year high with the 30-year mortgage. So very substantial rise in interest rates, housing, by and large, seeing slowly and existing home sales, because people aren't willing to maybe go out and get that new mortgage if they're locked in their existing home. But new home sales continue to be quite strong, which is holding up the housing market. Another positive has been inflation slowing down. Everyone was looking for that to happen this year had has been happening. You know, going back over the last year, we peaked out at CPI over 9%. Last June, you know, we brought that back down to about, you know, 3% headline number here today. So a lot of good work has been done. Now we're seeing within the fixed income markets that maybe the hard work is still ahead of us as the economy has been holding up a little bit stronger than maybe was expected.

Valuations Remain Extended

The market pullback here, at least the equity market has pulled back fairly strongly in August, along with the bond market, some of that we believe is in or related, given the interest rates have spiked up relatively quickly and started a little bit in July came back down, pushed much higher into August. But overall, the equity market had a phenomenal stretch going there off of you know, the video earnings back last May, June, and July were very substantial, upward markets. So there's a little bit of digestion going on there. But I also think that the realization of interest rates moving back up, the consumer doing a little bit better the realization that interest rates are probably going to be higher for longer. The Fed Chair Powell has continued to stress that you know they have a job, and they're going to do it. And 2% is their goal. And they actually are looking for the economy to slow more than it has already.

Valuations within the equity market, by and large, just on the S&P 500 really remained fairly unattractive just from a historical level. If you look just on a P multiple basis, you know, we're at extreme levels, we've come down in August. So that's been helpful, but you're still trading at a multiple that's much higher than history with interest rates that are much more extreme than what you would normally assess and associate these types of price to earnings multiples with. So to us, the bond market given the repricing has been much more severe. When you're out there looking at high quality corporate bonds and treasuries to a certain extent, there is a lot of yield to be had now, which is very positive. So though interest rates still could, you know, incrementally rise if the economy continues to keep on pace of a little bit stronger than what we've been expecting. You know, overall, there's still more value in the fixed-income marketplace than there is given the pricing and valuations within the equity market in our eyes.

Opportunities in International Markets

Within multi-asset portfolios and thinking about this type of market where elevated valuations are quite common across the globe, you know, we've really been looking at a few different areas, Japan's been one notable market where it does have a decent price in terms of valuation, there is a proactive effort to get that those valuations higher in terms of becoming more shareholder-friendly within the Japanese equity market, their economy is doing a little bit better than most of the equity markets. So that's definitely one area that we've started to focus in on a little bit more within multi asset portfolios. Emerging Asia and China are the other valuations that are quite clearly there for Chinese equities, the story has been quite bad. So we continue to look for the Chinese policymakers to likely increase their stimulative measures here coming up because they're just going to have to given the severe situation they're in with low consumer confidence and declining economic growth relative to what they had been experiencing, that that's an area that we continue to look at as a potential to enhance in the portfolios moving forward.

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