As for the stock market specifically:
The bond ratings service Fitch lowered the credit rating on the nation’s debt from AAA to AA+. This was the second time an agency downgraded the US Treasury from AAA to one notch lower.
The markets fared better this time. When this occurred in August 2011, the stock market fell about 5 percent that day. This time the markets fell only about 1%.
Fitch downgraded our credit rating due to the inability of “our friends in Washington” to regain control of our fiscal house.
The absolute debt level, as well as the percentage of GDP that debt comprises, are larger now than in 2011. We also have a larger amount of money going to debt service now than in 2011 since “our friends in Washington” continued to borrow short-term instead of locking in low interest rates for a prolonged period. Now, we have tons of debt coming due during a period of “high” interest rates.
Something that I found amusing about this last week was a person in the administration (among many) sounding off with great indignation about the downgrade and speaking along the lines of Kevin Bacon in the closing scene of Animal House. A quote by that same person from 2017 surfaced expressing incredulity that the ratings services didn’t downgrade our debt at that time when the other party was in charge.
History demonstrates that revenues tend to be a steady proportion of our gross domestic product, no matter the rate structure. History also shows that our elected officials continue to spend as sober (???) Congressmen, Senators, and Presidents.
Fitch cited as a reason for the downgrade that our elected officials tend to go to the brink to form a budget or increase the debt ceiling. We had a debt ceiling debate a few months ago that had as its result a suspension of the debt ceiling until January 2025.
I am certain that time will provide wailing and gnashing of teeth about our situation.
In June, the Treasury Department believed it would be necessary to borrow about $700 billion by the end of August to fund the government. They were off by about 50%, with the Treasury borrowing $1 trillion in the past 2 months (how could these smart people be “off” by 50% over such a short span ?!!?).
The good news is that the movement last week relieved a well overbought condition. The market simply is overbought now, no longer being well-overbought.
The bullish percent indicators had a rough week. They aren’t in danger of flipping yet, but I will keep watching for more trouble. The nature of the evidence states that WEALTH ACCUMULATION is in effect.
Remember, X’s mean OFFENSE or wealth accumulation, while O’s mean DEFENSE, or wealth preservation.
Below is where our indicators stand as of August 4, 2023 (Courtesy Dorsey, Wright, and Associates).
On a general note:
The Department of Labor took center stage last week with news that the US economy added 187,000 jobs in July. That was lower than anticipated, and the report also brought downward revisions of the number of jobs created in June and May. Those downward revisions totaled about 100,000 jobs. The unemployment rate remained steady at 3.5%. Average hourly earnings rose 4.4% compared to July 2022. That was the second consecutive month of wage gains higher than 4%.
The Federal Reserve released its employment cost index for the second quarter. This report showed that employers paid 4.5% more to employees in wages and benefits than the 2nd quarter of 2022.
I am unsure if we are out of the woods regarding inflation. First, the Teamsters union negotiated a 40% increase in pay for its renewed contract. Now, the United Auto Workers union is looking for a similar raise.
While labor unions comprise a low percentage of the workforce, 40 percent raises for employees will result in price hikes more than the 2 percent the Federal Reserve wants.
If you want more information or have any questions, please contact me.