An orgy of earnings reports, a Fed meeting, GDP, fireworks in China, new mask mandates, the infrastructure bill saga and a crypto rebound. There was plenty of externalities to push and pull the market around last week. The net outcome was predictably mixed, with stocks of international developed companies, and small US and value companies doing mostly fine while recent winners, large US growth companies, had a difficult week and emerging markets got taken behind the woodshed, as they say.
China was the elephant in the room last week as it appears to be doing an excellent job at crashing its own stock market, including announcing a plan on Monday that bans firms that teach school subjects from making profits, raising capital, or going public. Ed-tech, as it is known, is one of the fastest growing segments on the internet (many Chinese families have been known to spend up to 25% of their annual income on private tutoring), and the ban is leaving investors with steep losses and threatens the future of the entire industry. Although on Thursday China's Security Regulation Committee appeared to walk back part of its original statement which briefly eased concerns, the intense selling soon resumed and the Nasdaq Golden Dragon China Index—which follows U.S.-listed Chinese tech—ended July down 22%, with few investors very upbeat about how things will play out this coming week.
What is going on? There's a theory out there that I find very persuasive that China took a look at what happened in the US on January 6th, saw how the insurrection attempt was directly and indirectly provided with oxygen by an almost complete lack of tech and social media regulation over here and decided that something like that was never going to happen on their watch. The authorities want to ensure that they have their fingers in every tech pie or else! The incineration of the stock prices of many of these firms was an inevitable outcome. As is the way of things there, there were no public debates in a parliamentary chamber about this stuff or agreement to give financial markets a heads up on what they are going to do - which is why what happened caught most market-watchers and participants by surprise.
Back home in the US, the V is complete. The much-touted and equally much-maligned narrative of the V-shaped recovery has officially come to pass with GDP now surpassing pre-pandemic crash levels. No more other creative letters of the alphabet (W, K, M etc) being thrown around any more, thank goodness. It was a V all along.
Earnings issued last week were almost universally spectacular particularly from the likes of Tesla, Apple, Microsoft, Alphabet (Google), Starbucks and (to a lesser extent) Amazon, some of whom reported sales or profits almost doubling and obliterating estimates, yet most of these stocks struggled as the sense set in that this level of performance from these giants cannot be maintained for much longer, particularly once the base year-on-year comparison denominator period moves away from the darkest days of 2020.
There are plenty more earnings drops this coming week, too, including from Uber, DraftKings, Marriott International and Kraft Heinz as well as hundreds of smaller companies that are very sensitive to changes in the broad economic and COVID-regulation temperature. This week also sees the release of the latest US unemployment and manufacturing data as well as US Auto Sales figures, which are being scrutinized more than usual these days.
The CDC, in its characteristically clumsy fashion, amended its masking advice last week in response to the continued emergence of the Delta variant and patience with the voluntarily-unvaccinated seems to be finally running out as an increasing number of "jab for a job" initiatives are starting to be rolled out by much of the private sector, major municipalities and healthcare systems and even the federal government. While the focus continues to remain on how we are not out of the COVID woods yet, stock prices will always have the potential to take scary dives from time to time as a result.
As for the Fed, the U.S. central bank did exactly what everyone knew it would do — nothing. The plan remains in place to potentially raise interest rates in the first half of 2023 and it gave the US economy a grade of B-, saying there was still a long way to go to repairing the COVID-related damage to employment and inflation prospects. What is on the table, however, is the potential slowing down (which Wall Street insists on calling "tapering") of its monthly purchases of colossal amounts of government-backed debt, intended to keep money chugging through the economy by encouraging lending and spending.
Crypto rebounded nicely as Amazon hinted it might start taking some crypto-coin payments and a “buy the dip” mentality among some more mainstream investors finally emerged.
While stocks fell further over the course of the week, it should be noted that the major averages did gain for the month of July, adding to their collections of new all-time highs along the way. But the simple, unavoidable fact is that fewer and fewer stocks are consistently advancing and the short-term path of least resistance remains tilted to the downside.
The performance of market Buying Power and Selling Pressure last week (see below) confirmed the shaky price action of the major indexes and while some of the market’s “under the hood” problems are still relatively shallow, they have now persisted over sufficient time to start to elicit some real concern. As such, the shorter term risk vs. reward balance continues to appear unfavorable.
Note: as a result of what is happening in China and as a risk management control, our managed portfolios have sold all positions in EMQQ which holds a considerable amount of Chinese stocks.
Relatively speaking ..
- The S&P 500 outperformed the tech-heavy NASDAQ-100
- International developed markets had a positive week ahead of US markets while emerging market investments got battered by significant falls in many Chinese stocks (see above)
- A solid recovery week for small cap stocks (finally!), a little ahead of mid caps and well ahead of large caps
- Value stocks held up much better than growth stocks
Technical corner ..
In the overall US stock markets;
- The proprietary Lowry's measure for Market Buying Power fell 2 points and that of Market Selling Pressure rose 2 points
- SPY, the S&P 500 ETF, is still comfortably above both its 50-day and 200-day moving averages. It ended the week 0.57% below its all-time high of July 2021
- QQQ, the NASDAQ-100 ETF, is still comfortably above both its 50-day and 200-day moving averages. It ended the week 1.06% below its all-time high of July 2021
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across during the week.
Two for the price of one for you this week on the subject of home prices .. In the last eighteen months, everyone has become an expert at what is going on in real estate; all the city dwellers are moving to the suburbs, dumping apartments in favor of houses with a back yard and an office for working from home.
People breathlessly share their favorite anecdotal stories of sellers receiving tens of thousands of dollars more than they were asking (here's an amazing one!) and fist-fights caused by people cutting the line of potential buyers in front of open houses in New Jersey and Long Island. But where we are with house prices is more complex than that simple demand narrative - it's a supply thing and has been decades in the making.