Stocks performed poorly this week, despite promising results from companies and generally solid economic news. Fears of more interest rate hikes by the U.S. Federal Reserve drove Treasury yields higher.

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The long 10-year bond is 4.26%, while the 2-year bond is just below 5% at 4.92%—bonds and bills with a duration of 1 year or less yield 5%+. 

Simultaneously, mortgage rates rose to over 7%, reaching the highest value since the dot-com boom. High mortgage rates will cause the housing market to slow down because of the more significant mortgage payments. For instance, the difference between a 3% and 7% mortgage on a $500k house with 20% down is $1,000. The total interest paid will be $567k versus $206k. However, limited affordability for housing is causing the rental market to remain strong. 

Stock Market Overview

As shown by data from Stock Rover*, the stock market struggled this week in response to high yields and fears regarding further interest rate increases. All the leading indices declined for the week. The worst performing was the Russell 2000, followed by the Nasdaq, Dow Jones Industrial Averages (DJIA), and the S&P 500 Index.

All 11 sectors declined this week. Energy, Technology, and Healthcare were the top three sectors for the week. But the Communications Services, Real Estate, and Consumer Cyclical sectors performed worst.

Oil prices fell slightly above $81 per barrel on concerns about China’s slowing economy. The VIX climbed more than 12% but is still near the long-term average. The price of gold is now dropping on higher yields at $1,918 per ounce.

Source: Stock Rover*

The Nasdaq is performing the best for the year, followed by the S&P 500 Index, the Russell 2000, and the Dow 30. The Nasdaq is in a bull market, and the S&P 500 is close. In addition, eight of the 11 sectors are up year-to-date. The three best-performing sectors are Technology, Communication Services, and Consumer Cyclical. But the worst-performing sectors are Real Estate, Healthcare, and Utilities.

Source: Stock Rover*

The dividend growth investing strategy has returned to positive results across all categories. But the week’s decline took a toll on the year-to-date returns. The table below shows their performance by category.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 24.95X, and the Schiller P/E Ratio is about 30.14X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent correction and a bear market and rebound. Earnings multiples of more than 30X are overvalued based on historical data.

Economic News This Week

Retail Sales

The Commerce Department reported advance U.S. retail and food services sales increased (+0.7%) to $696.4B in July; this follows an upwardly revised (+0.6%) increase for June. Retail sales are up 3.2% year over year. Retail sales are primarily goods and are not adjusted for inflation. Total sales for May 2023 through July 2023 were up 2.3% year over year. Spending on autos and parts declined (-0.3%) in July. Excluding auto sales, retail sales were up (+1.0%). Increases in retail sales were broad-based, with increases in internet retail (+1.9%), sporting goods (+1.5%), food services (+1.4%), clothing (+1.0%), grocery (+0.8%), and building materials (+0.7%). 

When sales for gas stations and autos were excluded, retail sales increased (+1.0%). Core retail sales, a measurement that excludes spending on autos, gasoline, building materials, and food services, increased (+1.0%) in July. June’s core retail sales were revised to show sales increasing (+0.5%) instead of (+0.6%).

Residential Housing

The U.S. Census Bureau reported new residential building permits were up 0.1% in July to a seasonally adjusted 1.441M (-13.0%) below the July 2022 rate of 1.658M. Single-family permits were up (+0.6%) to 930K from an upwardly revised June figure of 924K. Single-family permits more than offset declines in permits for 2 to 4 units (-7.7%) and five units or more (-0.2%). Single-family permits increased in the Midwest (+3.6%), and South (+1.4%); the West reported flat (0.0%); and the Northeast reported a decrease (-10.5%). 

Privately-owned housing starts rose (+3.9%) to 1.452M, from a downwardly revised June estimate of 1.398M, and (+5.9%) above the July 2022 rate of 1.371M. Single-family starts were up (+6.7%) to 983K, as single-family homebuilding increased in the West (+28.5%) and Midwest (+12.5%), while the Northeast (-3.4%) and South (-1.3%) saw decreases. June’s reading was revised lower to show single-family starts at 921K units instead of the previously reported 935K. Privately-owned housing completions reported at 1.321M, down (-11.8%) from Junes upwardly revised 1.498M reading, and down (-5.4%) over July 2022. Single-family housing completions were reported at 1.018M, a (+1.3%) increase from the Junes upwardly revised rate of 1.005M, up (+1.4%) from July 2022.

Jobless Claims

The Labor Department reported a decrease in initial jobless claims for the week ending August 12th. The seasonally adjusted initial claims reported 239,000, a decrease of 11,000 from the previous week’s upwardly revised level. The four-week moving average, which smooths out volatility, was 234,250, an increase of 2,750 from the last week’s upwardly revised average. For the week ending August 5th, the insured unemployment rate increased (+0.1%) to 1.2%. The total number of unemployment claims for the week ending August 5th was reported at 1.716M, up 32,000 from the previous week’s level. The continuing claims’ 4-week moving average was 1.693M, which decreased 8,250 from the last week. 

According to the unadjusted data for the week ending August 12th, California (-3,519), Texas (-1,768), and Pennsylvania (-1,254) led the way in decreases for initial claims. Virginia (+1,055), Iowa (+978), and Illinois (+866) led the way in increases. Of the 53 states and U.S. territories, 43 reported a drop in initial claims, and 10 reported an increase. For the week ending July 29th, 1.834M people were receiving jobless benefits through state or federal programs, a decrease of 17,633 from the previous week. There were 1.481M weekly claims filed for the comparable week in 2022.

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