Will August Angst Lead to Feel Good Fall?

Breakwater Team • September 10, 2023

Will the Bull Market Rally Give Up the Ghost or Will We Have a Feel Good Fall?


As we wind down the summer, with kids back to school and work returning to something resembling a five day a week proposition, it has become an annual ritual to discuss the traditionally volatile months that usher in the Fall. Below are the YTD returns for major averages as of close 9/12/2023:

  • S&P 500 Index: 17.57%
  • Nasdaq Composite: 32.64%
  • Dow Jones Industrial Average: 4.31%
  • MSCI EAFE: 9.78%
  • MSCI Emerging Markets: 4.24%
  • BBg US Aggregate Bond Index: .63%

Interesting fact: Even after a bumper 2023 for the S&P 500 thus far since the start of 2022, it’s simply 1.2% higher than the Dow over the same 20+ months. 

While we have seen market declines for each of the last three Septembers, October, on the other hand, has been far kinder, with gains of nearly 7% in 2021 and 8% in 2022. By now we should all know that trading the calendar is hardly a recipe for sustained success, after all that would be far too easy. After a torrid start to 2023 through the first seven months of the year, a disappointing August and slow start to September has restored the universe to a more balanced level of investor sentiment. There seemed to be a building level of ebullience and with valuations full, if not stretched, the possibility of detachment from reality seemed altogether likely if not inevitable by late July. While I hate the phrase “market correction” as it implies the market is not reflecting the proper price of assets, an oxymoron if there was such a thing, periodic selling pressure can do some good. It’s difficult to put a finger on any one cause and we perfectly understand if you are somewhat spun around by all the seemingly contradictory data these last couple months. Just be happy you are not a central banker, posh room in Jackson Hole aside … With the hope of providing some clarity we thought it would be worthwhile unpacking a number of key areas of focus for the months ahead. Perhaps it will be a good sleep aid as well.


Earnings: Time and again you’ll hear the phrase that earnings drive stock prices and with discounted cash flows, still the preferred method for valuing assets better, or at least, less bad earnings should see prices increase. So, with 2’Q earnings coming in better than expected, why did stocks not respond more favorably to the numbers? According to FactSet, 79% of companies beat their earnings estimates (above 5-year average) with 64% beating on revenue (below 5-year average). Earnings are down about 4.1% year over year and witnessed a decline of 7.00% for the second quarter in what is likely to be the trough in this cycle. A weaker top line suggests some softening in demand, so that’s worth watching as there is only so much you can do with cost cutting and financial engineering. Guidance for 3’Q has improved somewhat off a low base and suggests year-over-year earnings growth of anywhere from 1-3%. As we wrap up 2023, earnings improve more sharply in the 4th quarter and into 2024 where low double digits have been penciled in. Given that markets are forward looking some of that is already reflected in prices. If earnings do in fact grow at those levels, stocks can support further gains, though they are likely to be modest given higher interest rates and full valuations with the S&P 500 trading around 18.5 on a forward basis.


Inflation: There has been encouraging news when it comes to the rate of price change, thus resurfacing the transitory argument, as supply chains continue to improve should demand remain at the current level there may well be some disinflation if not deflation on the horizon. The Fed’s preferred measure of inflation, core personal-consumption expenditures (PCE) came in at 4.2% in July when measured year to year, but on a month-on-month basis, prices increased at .20%, the lowest going back to March 2021. Headline inflation is likely to jump back up for August and possibly in September based on higher gasoline prices and some weather-related factors impacting food prices. Industrial metals have been marching higher based on an uptick in demand. The trend however is for inflation to continue to decline and as Fed Chair Jerome Powell stated unequivocally in Jackson Hole, that the target remains 2% even if it takes until 2025 to get there. Housing, which is measured as owner’s equivalent rent in the PCE measures, is likely to be a drag on inflation based on higher rates sapping demand for existing home sales and actual rent growth falling sharply after some catch up in 2021 and 2022 based on concessions made during the pandemic. For the August CPI release much was made of the core level being elevated yet the market shrugged off the “hotter number” mainly because it has done little to change the narrative around disinflation, looking at this data over a rolling 3 months is a better way to see whether or not there are real trends emerging versus one month’s report which is surely impacted by noise.


Federal Reserve:  June’s meeting brought the “pause/skip debate” but that was put to rest after the July meeting offered a 25-basis point hike, the 11th of this cycle taking Fed funds to the highest level since 2000. While the drumbeat from the various Fed governors is that they intend to take a wait and see approach, at this point my sense is that they are done hiking rates this cycle. Having adequately tightened monetary supply by hiking rates over 5.00% while shrinking their balance sheet by nearly $1TT the Fed has cooled down housing, increased the overall cost of borrowing and indirectly drained the animal spirits from the capital markets as evidenced by the decline in asset prices over the last couple of years. Hardly time to say, “mission accomplished,” a good deal of progress has been made. For the better part of the last 2 years, risk of not doing enough clearly outweighed doing too much, but several data points suggest that further tightening here could result in something else breaking (aside from a few banks) and with little appetite for a policy response from the Fed itself and nothing coming from the fiscal side, that seems imprudent. While we still wait for the lagged effect of tighter monetary policy, one place where the impact is felt more acutely and quickly is within the currency market, something I opined about last Fall when highlighting why a strong dollar was a source of concern. As the dollar has strengthened again quite a bit recently, it was on an 8-week winning streak the longest in nearly a decade and up 5% since early July the greenback has put pressure on various currencies around the world from China to Japan as well as UK and the EuroZone. While a weaker local currency can help export driven economies, it essentially means you are importing inflation at home, something the Europeans would greatly like to avoid having dodged an energy crisis last year with the invasion of Ukraine. Germany, the manufacturing powerhouse of the EU, would have benefited from similar dynamics in the past, but the weakness in China, a key trading partner, has made stagflation a real concern for the 4th largest economy in the world. More on this in a moment


Labor: Another Goldilocks nonfarm payroll report for August. The combination of job gains (187K), along with an increase in the unemployment and participation rates all while seeing hours worked increase and hourly wages increase more slowly (.2% month on month) suggest a cooling labor market. This was the equivalent of walking on water and just what the Fed has been hoping for if a soft landing/no landing is possible. With inflation being front and center the last couple of years, you’d be forgiven if you forgot that the Federal Reserve has a dual mandate to control inflation and target full employment. To temper the overly optimistic tone somewhat, we witnessed a decline in available jobs and a decline in quits in the Job Openings and Labor Turnover Survey (JOLTs) suggesting employers are getting a little more cautious as are employees. While labor is historically one of the key drivers of inflation, wage growth is only modestly higher than the projected 5-year inflation rate suggesting the vicious wage price spiral of the 70s is not likely to repeat. All eyes on the UAW strike, but keep in mind their 150,000 members represent about 1/10th of 1% of the working population in the US. Larger employers like Walmart, which employs over 1.6MM Americans have actually been cutting wages for new hires as the competition for jobs has abated in the last couple months.

Retail Spending: The endless debate on when and if consumers will run out of their pandemic savings has been going on for about a year and I still see the estimates ranging from $500BB to $1TT with estimates that it will be exhausted in about a year’s time. That may well be the case, and some indicators like increased credit card borrowing suggest we may be closer than we think, but healthy labor markets are able to cushion the impact here. After a .7% increase for July, only a .2% increase is forecast for August but that’s still healthy by most standards, especially for what is typically a less active month. As has been the case for much of the last decade there is a certain consumer whose demand is less susceptible to economic conditions as solid earnings from the likes of Lululemon suggest.


Sentiment levels:  At one point with the market within 5% of it’s all time high, achieved on January 3, 2022, the S&P has given back about 3.5% of the profits and investor’s moods have shifted. Back in July, the relative strength index (RSI) was consistently logging figures in the mid to high 70s suggesting the market had become overbought, we have drifted back to around 50, which while not quite oversold levels seem to indicate there is less froth out there. CNN’s Fear & Greed index has returned to a neutral reading from Greed a month or so ago and while the market volatility has dropped sharply there is a bias to negative skew meaning the cost of hedging has increased somewhat as stocks have given back some gains. There are some technical factors that are flashing yellow signals whether they be leading economic indicators that have rolled over and have been at recession levels for the last 12 months, granted those measures are focused more on durable goods and stocks are very close to their 50-day moving average suggesting if support is broken the next move may be lower.


China: One of the biggest questions on everyone’s mind is what is going on with the world’s second largest economy where growth and trade have disappointed all year despite emerging from Covid lockdowns. With stimulus targeted more at business versus everyday consumers they did not see the inflationary effects witnessed in the West, but their economy remains far too reliant on the commercial real estate market and manufacturing, the former having been a problem since 2015 and the latter coming more into focus with supply disruptions related to the pandemic. With China accounting for nearly 20% of global GDP yet only 12% consumption according to Michael Pettis, the argument is that it’s necessary for China to focus on consumption growth over the next 10 years at the expense of inefficient GDP growth. This would entail a rather large philosophical shift where the state would essentially look to transfer more wealth to the consumer through assets sales and social safety nets, something that they have been loathe to do at this point. It’s worth experimenting with as the current path seems likely to ignite pushback against Xi’s policies and suggest this may be his last 5-year term as leader of the Middle Kingdom. This may be too logical or optimistic, it would be a boon for US companies and perhaps even the Chinese stock market, but I am skeptical they will be willing to undergo such a drastic policy pivot and undertake the needed reforms. Both China and the US need each other as the rest of the world seems hardly up to the task. A healthy level of competition can be productive, see the Space Race or DARPA versus a more hostile policy of containment which increasing the odds of further frictions adding costs but for now China looks to be worth passing on until they embrace a model that hasn’t been working for the last 8 years or so and stop scapegoating the West.



In summary, the next couple of months may remain a bit choppy; on balance the economic backdrop at home has improved and the fact monetary policy should be more consistent should mean stocks can better discount the future. Should we see any improvement abroad that should power markets back to the levels from late July if not higher. There is reason to be optimistic out there and as my 5-year-old gets excited about Halloween, I get the sense that the 4th quarter may be more treat than trick this year, but time will tell. The bigger question is how many times the costume may change between now and then.

For those who endured, thanks for reading, feel free to share this and our other timely content with anyone who would benefit from our perspective.


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SOURCES: Barron’s, FactSet, WSJ, Bloomberg, FT, Charles Schwab & Co LLC
The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.

Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. https://adviserinfo.sec.gov/ Past performance is not a guarantee of future results.

The Dow:The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chipstocks. The market index is unmanaged. Investors cannot directly invest in the above index.

NASDAQ: The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers AutomatedQuotation System. You cannot directly invest in this index.

S&P 500: The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to berepresentative of the stock market in general. You cannot directly invest in this index.

MSCI EAFE: The MSCI EAFE Index (Europe, Australasia, Far East) is designed to measure the equitymarket performance of developed markets outside of the U.S. and Canada. You cannot directly invest in this index.

MSCI Emerging Markets: The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries*. With 1,421 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Bloomberg US Aggregate Bond Index: is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices.

Breakwater Team

At Breakwater Capital, we work with families across the United States, providing each client with a personalized experience tailored to their current circumstances, future goals, and timelines.

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Tariff Tantrums: Understanding the impetus and impact of a marked policy shift

By Breakwater Team • April 4, 2025
…grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. – Reinhold Niebuhr In a year that had already witnessed a noticeable uptick in volatility compared to the prior two years, the ongoing back and forth regarding looming tariffs, culminated in what has been described by many pundits as some of the most aggressive levies introduced since the 1890s. While the policy announcements themselves have been well telegraphed, the scope and scale are considerably higher than what was expected, as evidenced by the market’s harsh response. Rather than imposing tariffs based on pre-existing trade protections with our counterparties (i.e., existing tariffs, subsidies, or other barriers to entry) the formula to arrive at the tariffs focused more on the trade imbalance between the two nations. As the largest economy in the world, trading with nearly everyone, many of which are much smaller countries/economies, this was ripe for distortion. For those who have been long time followers of President Trump’s beliefs this should come as little surprise, a recent piece in the WSJ captures quotes dating back to the 1980s which share his perspective that the US was drawing the short straw and other nations should have to pay to access our robust and dynamic economy.  Going back to the days of the earliest trade when men roamed the earth hunting for food there has always been some degree of mercantilism whereby one group looks to accumulate power and wealth and protect their own interests, but in the Post World War II era, it’s inarguable that the US has benefited enormously from their embrace of “free trade” and capitalism. Our economy has grown a hundredfold since 1950 when it was approximately $270BB. The naysayers will point out that back then the US accounted for about 50% of global GDP, peak wealth, or about twice what it is today, but that fails to account for the fact that much of the world having fought the theatres of war in both Europe and the Pacific was in ruin and needing to be rebuilt. There is a misconception that both NAFTA (1994) and China’s entry into the World Trade Organization (2001) were the watershed moments leading to the hollowing out of the US’s manufacturing base, but in reality manufacturing employment had been in decline going back to 1950. At its peak US manufacturing workers accounted for about 30-35% of the nonfarm workforce, whereas today that level sits at around 8% where it has hovered for the last 15 years. In 2000 it was just 15% so still very much the minority. This long-term shift in the mix of the US economy where services now account for a disproportionate percentage of GDP and the workforce overall is the result of a far more skilled workforce driving both innovation and productivity. Surely some manufacturing jobs have left based on the focus on corporate profits, but some of the change relates to comparative advantage and inexpensive labor. It’s not to say, that we should look to push all manufacturing to the most “efficient” destination, surely it’s important to maintain control of manufacturing of critical components to defense, information technology or medicine, but it seems unrealistic at best to expect that we can produce enough and at reasonable costs to satisfy our insatiable demand. We are after all only about 5% of the world’s population, though we account for 25% of global GDP. Talk about punching above our weight. Aside from the logistical challenges that reshoring/onshoring pose, not to mention the timeline associated with the payback for such efforts, the willingness or lack thereof on the part of the business and consumers alike beg the question of whether or not it is worth pursuing. Considering our societal tendencies for policy to reverse course every 4-8 years with Washington’s constant changing of the guard which has grown even more partisan in recent years, it’s hard to envision the private sector making these investments where there may be little or no long-term benefit to the majority of stakeholders, mainly consumers and shareholders alike. If we are being intellectually honest, as we have seen with the likes of Amazon, if automation or robotics can do the work better than human beings, who need benefits and breaks, the case for this policy bolstering manufacturing employment seems weak at best. That’s one of the key pillars of the artificial bull case after all. In addition, there is clear evidence that economies which produce a disproportionate amount of goods versus services are much more susceptible to the boom bust cycle as demand for goods themselves is far more cyclical, look no further than Japan and Germany whose export driven economies have largely languished for the last 20 years in the slow growth/no growth period in the aftermath of the Great Financial Crisis. Let’s put all this into context, according to the World Trade Organization as of 2023 the US had a trade weighted tariff rate of 2.2% lower than nearly all countries around the world. For a country that is such a massive importer one might argue the low levels fostered healthy trade relations with some of our key allies and admittedly some frenemies or altogether poor bedfellows. With these sweeping tariffs, some as high as 49%, this marked a significant shift in policy where the aforementioned tariff rates will approach 30%, having a significant and lasting impact on consumers and businesses alike. Whether you want to describe a tariff as something different than a tax seems to be semantics, the added expense is rarely fully eaten by the producer. In the aftermath of the pandemic and the correspondingly high inflation due to excessive fiscal and monetary policy along with supply side disruptions, its doesn’t require too much detective work to know the average American is exhausted or outraged by higher prices. The tariffs will only add to the price at the register unless we all of a sudden find the private sector extraordinarily benevolent, willing for much if not all of the added costs to result in shrinking margins. By now you have surely figured out why there was such a market kerfuffle, but let’s make sure to fully examine why the result was to shave $3 trillion of market value off of US stocks in one day, which supposedly is the equivalent of 5 years’ worth of tariff receipts. First and foremost, despite opening the year with an economy bumping along with real GDP around 2.50% we have seen a sharp decline in the soft data, where surveys from the confidence board and University of Michigan plumb levels we have not seen going back to the pandemic when fears of a severe respiratory infection and 10% unemployment were front of mind. The hard data has been only a little better as labor has held up thus far, but as we have seen in Retails Sales there are signs that the consumer may be tapped out or growing wearier. With GDP likely to be between negative .5% to positive .50% for Q’1 that it’s like slamming on the brakes while driving in the passing lane. No surprise that there may be a real sense of whiplash. As the odds of a recession have risen, something the President himself acknowledges, it’s safe to assume expectations for earnings growth this year and next seem to be slipping away. With valuations stretched, there has been little margin for error and it’s those stocks, some of the most expensive that have felt the impact that much more acutely. This is why we have heard the “Mag 7” referred to as the “Lag 7” here in early 2025. Now you might be thinking this is likely transitory, a word that is making its rounds again after an ill-feted debut to Wall Street vernacular in 2022. If we are in fact, we are likely to see a shift to a more capital-intensive economy, is it reasonable to justify such high multiples which made more sense in an asset light, intangible heavy ecosystem? It seems hard to justify, from this vantage point. Hopefully, we will avert a recession, but that’s not to say it is an all-clear sign for the stock market. Earnings recessions, like that of 2022, may not lead to large scale job losses and disinflation, but increase the prospects for a bear market. There is a risk here that those fat margins whither because of trade frictions and lead to something more pernicious like a repeat of the stagflation episode of the 1970s and early 1980s where higher inflation sucks the oxygen out of the room leaving little room for real growth. So, what is an investor to do… Well for one thing, maintaining discipline in the form of diversification has helped and likely will continue to, with investors who have roughly half of their portfolio in overseas stocks and fixed income, the positive returns in these two areas have been able to offset some of the decline in US stocks. Incorporating other assets like Treasury Inflation Protected Securities (TIPs), gold or real estate may help mitigate the risk somewhat but as we have seen in the past times of market angst correlations often increase, giving the appearance there is no place to hide. Eventually markets will calm down, as the last of the sellers capitulate, though that process can take weeks or even months to play out. I’ll leave you with some quotes from some of the smartest minds on Wall Street to ponder as we head into the weekend. “Sometimes the share price of a firm tells the CEO of that firm nothing about their company they didn’t already know. Other times, the stock market takes on the role of “active informant.” Stock prices predict investment because they provide business managers with useful information about the future. I think now is probably one of those times. -Neil Dutta, Head of Economics, Renaissance Macro “We all know the math: the stock market has historically grown by 10-11% over the long run but only gone up 60-70% of the time. That means it has corrected 30-40% of the time. Surviving those drawdowns is the price of admission.” -Jurrien Timmer, Director of Global Macro at Fidelity Investments “We are a great nation, the leader of the free world. Yet we squander our political power to appease the textile industry in the Carolinas! We should instead be setting a standard or the world by practicing freedom of competition, of trade, and of enterprise that we preach. -Milton Freidman This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.

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By Breakwater Team • March 31, 2025
If you’re a business owner, you’ve undoubtedly spent years building your company and made countless sacrifices. Have you considered how your business will transition to new leadership when you’re ready to step aside and pursue other goals? A succession plan can help preserve the value you’ve worked hard to build. Succession planning is not just about who takes over but how the transition happens to ensure the business’s long-term survival. Whether passing ownership to family, employees, or external buyers, it’s wise to have a strategic plan that minimizes disruption and protects your company’s value.  At Breakwater Capital Group , we help business owners develop comprehensive succession plans. With decades of experience, Breakwater is a fee-only fiduciary financial advisory firm serving clients nationwide with wealth management offices in Denver, CO, Paramus, NJ, and Greater Boston, MA. This blog explains why having a succession plan is important, outlines its key components, and shows how Breakwater can assist you in this crucial process.

Protect Your Wealth During Market Volatility

By Breakwater Team • March 31, 2025
Watching the news and seeing sudden drops in stock prices or economic events that threaten your wealth is stressful. Market volatility is becoming more common in today’s fast-paced and interconnected world. However, depending on how you’re invested and what your financial situation is, a volatile market doesn’t automatically spell trouble.  At Breakwater Capital Group , we navigate economic uncertainty with personalized financial planning and investment strategies. As a fee-only fiduciary financial advisory firm, we proudly serve clients nationwide, with wealth management offices in Denver, CO, Paramus, NJ, and Greater Boston, MA. In this blog, we’ll explore what market volatility is, how to be mindful of it, and the strategies Breakwater uses to help clients manage it effectively.

Preparing for College Costs: A Guide for Massachusetts Parents

By Breakwater Team • March 24, 2025
Every parent wants to give their child the best opportunities in life, and a quality education is a key part of that. However, with college costs rising rapidly, planning ahead has never been more important. Over the past 20 years, tuition and fees at public four-year institutions have more than doubled, making it essential for families to explore various options and develop a savings strategy. At Breakwater Capital Group , our Greater Boston based wealth management team works with individuals and families nationwide to develop financial plans that incorporate college savings while keeping other financial priorities on track.  This guide discusses the rising cost of college, available financial aid, and practical strategies to help Greater Boston parents prepare.