There’s irony in the fact that the month of August is named after Augustus, who famously boasted that he found Rome a city of bricks and left it a city of marble. A month named after a Roman emperor (coincidentally, it’s the anniversary of his death on 19 August) associated with prosperity tends not to be a great month for the markets. 2023, so far, is no exception.
This week, the S&P 500 has fallen 2.1% and the Nasdaq is down 2.4%. There are no previously unknown risks or new headlines driving markets down—just the familiar concerns about a slowdown in the Chinese economy, the possible direction of interest rates amid uncertainty about growth and inflation, and the trend of corporate earnings.
It’s worth noting that this month’s downturn breaks the longest winning streak in equities since 2020. Corrections such as this are not unusual following sharp market recoveries, as is the case with the current recovery from which investors have benefitted since the lows of October 2022. Even after its decline this week, the S&P 500 is still up 24% in USD for the past ten months.
Downturns are part of normal market behaviour, with lower-than-expected earnings, negative macroeconomic indicators, geopolitical risks, monetary policy, and concerns about company valuations among the many factors that can cause a correction. These spikes and dips are irrelevant when investing for the long term.
If we had to look at markets since the COVID-19 low in March 2020, we would see that they’ve had a substantial rebound—106% up for the S&P500. But if we zoom in on selected months in that timeframe, we’ll see that this surge was accompanied by several sharp drawdowns. And it’s also not unusual to see choppy trading in August, when many northern hemisphere traders are on holiday. Since 1986, August has, on average, been the worst month for the stock market.
“Markets move in cycles. These can be prolonged and pronounced. These are always accompanied by narratives that allow us to explain and extrapolate. At the peak of a particular cycle, we will feel as if there isn’t even a cycle. The future path and the right decision to make will seem obvious.”
– Joe Wiggins, financial author
“If you want a rainbow, you have to deal with the rain.”
– Attributed to Augustus (perhaps apocryphal)
Global News
- Although the S&P 500 index is up 15% so far this year and the Nasdaq composite is more than 27% higher, SEC filings show that Warren Buffett’s Berkshire Hathaway sold almost $8 billion more in shares than it bought in the second quarter of 2023.
- Goldman Sachs Group believe the Fed will start dropping rates by the end of next June, which will be followed by a gradual, quarterly pace of reductions from that point. However, officials are still concerned that inflation could fail to recede and that further interest rate increases would be needed.
- While Treasury Secretary Janet Yellen has cited China’s economic woes as being a “risk factor” for the US, she remains optimistic about her country’s prospects in that growth is still healthy, the job market is very strong, and inflation is coming down. Meanwhile The People’s Bank of China dropped the rate on its one-year loans by 15bps to 2.5%, marking the steepest cut in three years, against expectations it would stay unchanged. This came just before July data that showed weak consumer spending growth, sliding investment, and rising unemployment.
- There could be another large hike in the UK’s interest rate as wages are growing at the fastest pace on record. This would set the nation’s battered bond market up for further losses. Analysts at firms including Saxo Bank and TD Securities said the hike could be as much as 50bps.
- Russia’s central bank lifted interest rates from 8.5% to 12% in an emergency meeting, indicating another increase is possible. However, it failed to reverse declines in the ruble amid one of the steepest depreciations in emerging market currencies. It may now partially reinstate capital controls to stem the 25% year-to-date slump in the currency to levels not seen since the start of the war in Ukraine.
- Apple’s next-generation iPhone 15 is starting to roll onto production lines in Tamil Nadu, India, as Foxconn and the smartphone giant seek to further narrow the gap between its India operations and main manufacturing base in China, according to sources.
- As at Thursday’s close the S&P was down 2.1% for the week.
Local News
- Seven opposition parties holding “moonshot” pact discussions in Kempton Park ahead of national elections, will rebrand their pre-election agreement as the Multi-Party Charter for South Africa. Notably, they have also agreed on a governance structure should they oust the ANC. Leader of the DA, John Steenhuisen, could well become Deputy President if the coalition parties are successful in the 2024 election.
- Peter Attard Montalto, who leads on the political economy, markets and the Just Energy Transition at Intellidex, believes that the recent taxi strike in Cape Town, which he says was “an extremely rare example of a discrete localised pure political fight between two sets of actors,” will not swing any votes in next year’s election.
- President Cyril Ramaphosa has said that there has been progress in stamping out corruption, with freezing orders worth R13 billion being granted to the National Prosecuting Authority, while R5.4 billion has been traced and returned to the state. (We note that whilst this progress is encouraging, it represents a minuscule amount in the context of aggregated State Capture which The Daily Maverick estimated in 2019 had cost the country as much as a R1.5 trillion). The President added that government now needs to focus on strengthening law enforcement and protecting whistle-blowers.
- Rand traders are looking ahead to next year’s election, betting that it will lead to more instability in the currency. The rand’s one-year implied volatility — the options market’s estimates of price swings over the life of the contract — has shot up from three-year lows reached last month. However, the local currency may benefit from an easing of the loadshedding crisis that has been a contributing factor to its weakness this year.
- The country could intensely boost economic growth if it fixed Transnet and Eskom, according to the IMF. The international fund believes that, if structural aspects are tackled, growth can increase `to 2.5% to 3% as compared to 1.9% last year and predictions for 0.3% this year.
- Absa reported minimal growth in interim profit, even as it increased its dividend payout, noting that customers are struggling to repay their debts during a tough economic environment. In contrast, Standard Bank reported a 44% increase in profit for the six months to June against a year ago, while also noting difficult trading conditions.
- MTN’s share price surged as it announced improved interim profit and news that Mastercard will take a minority stake in its growing R100 billion fintech business, which will expand MTN’s offerings. The share price gain on Monday added nearly R12 billion to its market cap.
- As at the time of writing, the rand was 0.9% weaker and the ALSI was 4.8% down for the week.
Sources: Dynasty, Bloomberg, Daily Maverick, BusinessLIVE, News24, CNN, Moneyweb, M&G, etc.
