CWS Market Review – August 29, 2023

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Jay Powell Gives Stocks a Boost

“August, die she must.” So sang Simon and Garfunkel. Indeed, the month of August is nearly over, and it’s been a slightly negative one for Wall Street. Through Tuesday, the S&P 500 is down 2% for the month. Of course, that’s not a very big drop in any historical context, but it could be our first monthly loss since February.

Interestingly, when the mini-selloff started at the beginning of the month, growth stocks took much of the heat. That’s standard for a downward market, but then things changed, and it was value suffering the most.

The S&P 500 even closed below its 50-day moving average for nine days in a row. The streak finally ended today thanks to a nice three-day rally on Wall Street. In fact, the S&P 500 just posted its best three-day run since March.

On Tuesday, the S&P 500 had its best day since June 2. If you want to split hairs, Tuesday’s gain was a millimeter behind the gain from June 2 (1.453% to 1.451%).

What’s the cause for the late-August optimism? That’s no secret. It was largely due to the Fed Chairman Jerome Powell’s tempered outlook at Jackson Hole this past weekend.

On the weekend before Labor Day, the Federal Reserve holds its annual powwow in Jackson Hole, WY. On Friday, Jerome Powell gave a speech in which he stressed the need to be vigilant against inflation. That’s pretty much boilerplate for any big Fed conference although he did say that more rate hikes may be coming.

Powell didn’t give a lot of details, but he did say that the Fed has made considerable progress in fighting inflation. Last summer, the 12-month inflation rate peaked at more than 9%. It’s down by about two-thirds since then. Bear in mind that prices are still rising, just at a slower rate.

Powell said, “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

While that sounds tough, it’s noticeably different from last year’s Jackson Hole conference. That’s when Powell made headlines by saying that “some pain” will be needed to confront inflation. That line seriously rattled the markets. In fact, stocks didn’t turn positive until October.

This year, markets are far more pleased. I think many observers were concerned that Powell would deploy more “some pain”-type of rhetoric. That didn’t happen and stocks and bonds are rallying. Over the last week, the yield on the 10-year Treasury has fallen by 0.2%.

We don’t have the August inflation numbers yet, but the core inflation rates for both June and July were 0.2%. That’s pretty good. Powell agreed that those numbers are good, but he added that it’s “only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”

The Fed is winning the war against inflation, but it’s important to stress that the battle isn’t over just yet.

Another good development is that the Fed has reduced its gigantic balance sheet. The Fed has allowed nearly $1 trillion worth of bonds to roll off since the middle of last year.

The Fed meets again in three weeks. This will be another meeting where the Fed will update its economic forecasts. For now, the futures markets largely expect another pause from the Fed. That means the central bank will vote to keep its target range for the Fed funds rate at 5.25% to 5.50%. Interest rates haven’t been this high in 22 years.

After next month’s meeting, things get a little cloudy. The Fed won’t meet again until early November. Right now, it looks to be a tossup on the odds for another rate hike. Futures traders are about evenly divided between a 0.25% rate hike and another rate pause. Obviously, the data between now and then will help tip the balance.

We can’t say for certain, but this could be end of the Fed’s rate-hiking cycle. Even if there’s another hike or two coming, the long series of hikes is mostly likely past us. Traders currently think there’s a decent shot of a Fed rate cut by May. I’m skeptical but I understand that investors are concerned about future economic growth.

Higher interest rates have an important influence on investors as they force investors to become more conservative with their portfolios. Cheap money can initially reward foolish ideas. Those rewards often don’t stay for long.

Better’s SPAC Goes SPLAT

Speaking of silly behavior, Better.com (BETR) has seen better days. The online mortgage lender went public this week, but not by the traditional route.

Instead, Better.com’s parent company, Better Home & Finance, merged with Aurora Acquisition Corp. (AURC)

Never heard of them? Well, you’re not alone. Aurora is a Special Purpose Acquisition Company, better known as a SPAC.

SPACs are basically shell companies that are already listed on the exchanges. Instead of going public through an IPO, a SPAC will buy an unlisted company thereby making it publicly traded. That way, it skips a lot of bureaucratic steps.

If you think SPACs are sketchy, I agree. The day before the Better deal, shares of Aurora were trading at $17.44. After the deal, the stock fell to $1.15. Now it’s at 85 cents per share. The SPAC is now a speck.

SPACs were all the rage a few years ago. It’s amazing how low interest rates can make smart people do a lot of silly things. In Q1 of 2021, 278 SPACs hit the market. In Q2 of this year, only four went public. In Q1 of 2021, 98 SPAC deals were announced, but only 100 in the first half of this year.

Bloomberg notes that there have been 11 SPAC deals this month. Nine of them are in the red. The median loss is 41%. Roughly 40% of the 400 SPACs now trade below $2 per share. Most SPACS started at $10 per share so we’re talking about an 80% loss.

Better is fighting two headwinds at the same time. It’s a terrible market for SPACs and it’s a lousy market for mortgages. Better is already considered somewhat shady. This is the company that made the news two years ago when it fired 900 employees over Zoom. These aren’t exactly PR geniuses we’re dealing with.

If that’s not enough, the SEC delayed Better’s SPAC deal until it concluded an investigation to see if it had violated securities law. The SEC ultimately decided against any enforcement action.

Better is only the latest in a series of SPACs than have gone splat. Shares of WeWork (WE) and Virgin Galactic (SPCE) have both been crushed. Virgin Orbit and Pear Therapeutics both filed for bankruptcy. WeWork may not be far behind.

It really is all driven by interest rates. When rates are high, the future is expensive, but when rates are low, the future is cheap — and sometimes it gets too cheap.

That’s all for now. The stock market will be closed on Monday for Labor Day. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on August 29th, 2023 at 6:53 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.