September 1, 2023
Equity markets pulled back in August, as the S&P 500 was down -1.59%, US small caps -4.14%, US mid-caps -2.89%, international developed -3.76%, and emerging markets -5.50%1. The US Aggregate Bond Index declined -0.64% in August1.
We proactively took action to reduce losses by reducing equity exposures for most clients near the 2023 equity market highs on 8/2/23, and putting the proceeds into fixed income. The S&P 500 had risen +29.67% from 10/12/22-8/1/23, so our view was that any significant negative catalyst could trigger a short-term decline1.
Short-term negative catalysts in August included Moody’s downgrading certain small and mid-sized banks and warning of potential downgrades for some larger banks, and Fitch downgrading the US federal government credit rating (to a still-strong “AA+” rating) and warning of possible downgrades of banks of various sizes2. We believe that changes to credit ratings have often been backward-looking historically, and that the US federal government and our nation’s largest banks remain on firm financial footing. If the equity markets were to decline significantly further from here, we would likely trim fixed income exposures in order to add to equity exposures.
We believe the trend of inflation decelerating, or getting “less bad,” since June 2022 will ultimately be supportive of equity
markets.
The 10-year Treasury yield rose in August from 3.97% to 4.09%, causing Treasury bond prices to decline1. It seems to us that in the short term, interest rates have been influenced by the US Federal Reserve (“Fed”) allowing up to $60bn of Treasuries and $35bn of mort-gage-backed securities to roll off its balance sheet each month3. We anticipate that the Fed will stop allowing its balance sheet to shrink once inflation gets closer to its 2% target, which should cause interest rates to stabilize, given the prevailing trend of the inflation rate slowing down.
External sources: Refinitiv data1, CNBC2, Richmond Fed3.
For more information about our investment philosophy, see MTC Wealth Management.
Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance is not indicative of future results. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Any opinions expressed are those of the presenter and do not necessarily reflect the position of Members Trust Company. The information above is obtained or compiled from sources we believe to be reliable. We Do Not Guarantee that such information, will be free from errors, omissions, whether human or mechanical, nor do we guarantee their timeliness, accuracy, or completeness.