Market Trends to Watch for in August
Here are the themes and trends for investors to monitor in the coming month.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
It is hard to believe, but the month of July is already almost ready to close. We are halfway through the dog days of summer here in my little oasis of Delray Beach, Florida.
It has been a memorable month for investors who have been treated to one of the sharpest and quickest sector rotations in recent memory over the past few weeks. After underperforming for a couple of years, small caps have benefited greatly from the stampede out of Big Tech this month. Whether this trend continues into next month is one of several things that I will be keeping my eye on in August. My portfolio certainly has been the beneficiary of this move as small- and mid-cap stocks were one of the few areas I have been able to find value in recent months within an overbought market.
Investors came into July with much optimism that the central bank would start cutting the fed funds rate in the months ahead. Those hopes appear to have become a reality, as based on futures, an interest rate decrease at the September FOMC meeting has become a near lock. This, despite a much better than expected initial reading of second quarter GDP growth last week. Investors should be careful what they wish for as inflation is far from dead as "official" figures understate the true rate of inflation, in my opinion.
In addition, one or two 25 bps cuts to interest rates will only help the moribund housing sector on the margins. The SPDR S&P Homebuilders ETF XHB has gained just over 15% over the past month with well-known home builder names like Toll Brothers, Inc. (TOL) rising more than 20%. I would not be surprised to see these rallies dissipate in August as reality sets in on what will continue to be a challenged housing industry with housing affordability remaining near record lows.
A few rate cuts will do little to nothing for commercial real estate, especially the imploding office sector. Office values in many major cities have cratered to the point where equity value has completely vanished around many previous trophy properties. Being able to refinance a 5% loan from 2018 or 2019 for 9% instead of 10% is hardly appealing when no equity is left on the property and cash flows have turned negative. The delinquency rate on office based commercial mortgage-backed securities rose 61 basis points to 7.55% in June, according to Trepp. Delinquencies look destined to breach the 10% level in the coming quarters.
I expect the impacts from deteriorating CRE loan books to become more apparent to the regional banks as we get further into this year. This will result in rising credit loss provisions. This trend will increasingly impact the bottom line of most of the regional banking system.
Finally, I will be watching the yield curve, specifically the yield divergence between the two- and ten-year treasury yields. These have been inverted for over two years now but are narrowing rapidly. Yields between two- and ten-year debt univerted this month in the U.K. Historically, when this happened, it meant the economy was entering a recession. I will be watching if that holds across the pond as that could foreshadow what occurs in the U.S. as our yield curve returns to a normalized state.
At the time of publication, Jensen had no positions in any securities mentioned.
