Stocks were weak in August, a noticeable change from the previous several months. In the US, indices of large and small companies fell. Markets outside the US experienced mid-single-digit declines. The bond market was also weak due to higher interest rates, but the market for riskier borrowers has remained resilient. Credit spreads have remained tight despite pockets of distress.
Economic data has been, overall, better than feared. The labor market has softened, but not materially. Inflation has decelerated, but not enough to the Fed’s liking. The consumer seems relatively resilient, but credit card and auto loan delinquencies are up. All of the aforementioned is before the September resumption of student loan repayments. 30-year mortgage rates are over 7%, but the vast majority of homeowners either borrowed at rates below 5% or have no mortgage. The real economy is growing at a healthy enough pace, but the outlook for growth is cooling some. In our opinion, the economy has been okay, which has allowed the rate environment to remain higher. In contrast, the market’s rate forecast has moved more in line with the Federal Reserve’s.
Reading the economic data is something of a Rorschach test. That is not so unusual, but what is unusual is the range of economic scenarios that seem plausible. At present, the data can support several narratives and a wide range of forecasts. Often, it is something not widely known or predicted that can have the biggest impact on markets. We think the range of outcomes and the inherent uncertainty embedded in economic forecasts make a strong case for diversification.