Stocks retreat on news from the Fed and China

Global equity markets recorded losses in August–just the second monthly downturn thus far in 2023–due to investors’ uncertainty regarding the direction of U.S. Federal Reserve (Fed) monetary policy, as well as worries about China’s weakening economy. Developed markets outperformed their emerging-market counterparts during the month. The Nordic countries recorded comparatively smaller losses and were the top performers among developed markets in August, bolstered mainly by strength in Denmark. The Pacific ex Japan region was the primary market laggard due largely to significant weakness in New Zealand. Europe led the emerging markets during the month, benefiting from notable gains in Egypt and Turkey. Conversely, stocks in Colombia and South Africa experienced double-digit losses and were the weakest emerging-market performers in August.¹

During a speech at the Kansas City Fed’s annual economic symposium at Jackson Hole, Wyoming, in late August, Fed Chair Jerome Powell reiterated the central bank’s goal of reducing the annual rate of inflation to 2%, and said that the Fed would consider additional interest-rate hikes if needed. Powell commented, “We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to [2%] over time.” He also noted that the central bank “will assess our progress based on the totality of the data and the evolving outlook and risks.”

China, the world’s second-largest economy, has recently experienced relatively weak credit growth, a downturn in exports, and a year-over-year decline in consumer prices. Lower demand for goods and services from Chinese consumers could have a negative impact on other countries’ exports of iron ore, crude oil, factory equipment, and luxury goods into the country. U.S.-based manufacturers of chemicals and heavy machinery have cautioned that they may experience a slowdown of sales in China. Additionally, a large property developer filed for protection under Chapter 15 of the U.S. bankruptcy code, which safeguards non-U.S. companies that are undergoing debt restructurings from creditors seeking to sue the firms or to freeze their assets in the U.S.

Most global fixed-income asset classes lost ground in August. However, U.S. high-yield bonds registered positive returns and were the top performers within the U.S. market for the period. ² U.S. corporate bonds, mortgage-backed securities (MBS) and U.S. Treasurys declined.³ Treasury yields moved modestly higher in the intermediate and long segments of the curve, while the direction of yields was mixed in the short end (bond prices move inversely to yields). The yield on the 2-year Treasury note dipped 3 basis points (0.03%), and yields on 3-, 5-, and 10-year notes rose 0.03%, 0.05%, and 0.12%, respectively, in August. The spread between 10- and 2-year notes moved from -0.91% to -0.76% during the month, and the yield curve remained inverted.

Global commodity prices saw mixed performance in August. The West Texas Intermediate (WTI) crude-oil spot price and the Brent crude oil price gained 2.1% and 1.6%, respectively, in U.S. dollar terms, on expectations that production output cuts from the Organization of the Petroleum Exporting Countries (OPEC) would continue through the end of 2023. The gold spot price was down 4.1% for the month due to strength in the U.S. dollar. The New York Mercantile Exchange (NYMEX) natural gas price rose 5.1% in August, benefiting from forecasts for more hot weather in the U.S., which would increase demand. Wheat prices fell nearly 10% over the month due to Russia’s shipments of large quantities of cheaply priced grain.⁴

¹ All equity market performance statements are based on the MSCI All-Country World Index (ACWI).

² According to the ICE BofA U.S. High Yield Constrained Index.

³ According to the ICE BofA U.S. Corporate, Bloomberg US Mortgage Backed Securities, and ICE BofA U.S. Treasury indexes.

⁴   According to market data from The Wall Street Journal.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.

There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.

Diversification may not protect against market risk. Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI©).