Bank of America became the latest to hop aboard the now-rather crowded Happy Train early last week, eagerly joining Team No Recession. The abrupt change of stance comes just a week after Federal Reserve Chair Jerome Powell told reporters that the central bank’s own economists are no longer forecasting a recession. As BofA economists put it in a note to clients on Wednesday;“Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the US economy,”
The no-recession narrative appeared to have been endorsed by the latest Job Openings and Labor Turnover Survey (JOLTS), which is reverting to its pre-COVID trend path, showing the number of people hired in June was down by 326k from May. We can now safely say that, since late 2021, hiring has gone from insanely hot to pleasantly warm.
The same trend is evident in the rate at which workers voluntarily quit their jobs. The peak point of people leaving their jobs was around the same time, in November 2021, when the quit rate hit 3.0%, an all-time high. In June 2023, it fell to 2.4%, close to the 2019 average of about 2.3% The Great Resignation has finally given way to The Normal, Healthy Job Market Resignation.
The Bank of England (BOE) copied their big brothers’ homework, following the Fed and the European Central Bank (ECB) and raising interest rates by a quarter of a percent last week and refusing to rule out further hikes.
It was an insanely busy week of earnings reports and it ended up mixed with a negative tilt. There was better than expected news from some (Amazon (AMZN), Caterpillar (CAT), CVS Pharmacy (CVS), Amgen (AMGN), Match (MTCH) and Walgreens (WBA)) and disappointment from others (Apple (AAPL), Pfizer (PFE), Merck (MRK), Paypal (PYPL), Qualcomm (QCOM), Uber (UBER) despite booking its first-ever profitable quarter, Airnb (ABNB) and Etsy (ETSY)).
After a couple of days of churning sideways, markets opened on Wednesday ready to react to the US ratings downgrade (see OTHER NEWS below), spiking market interest rates and the circus of the latest Trump indictment. More importantly, stocks have been in an overbought condition with the S&P 500 above 4500 and just a few percentage points away from a new all-time high and the stage was set for some kind of short-term reversal.
So it wasn’t really a surprise when prices fell quite hard on Wednesday, especially for the FAAMGs and the YUCs as investors appeared to be booking profits on some of their best-performing recent purchases, spurred on by the Fitch news and some mostly disappointing earnings reports that day. Remarkably, this was the first 1%+ fall in the S&P 500 index in a single day since May 23rd.
This skittishness was emphasized by a further dive in stocks late in the day following a nonsense rumor of an active shooter in the Senate building. This is typical of the behavior of a market actively looking for reasons to pull back and take a breather.
After a flat-to-lower Thursday, Friday saw the latest Jobs Report come out pre-market and it had a little bit for everyone — fewer jobs created than expected (187k vs 200k expected), but unemployment a bit lower (3.5% vs 3.6% expected) and wages picked up at a little higher pace than forecast (4.4% up on a year ago). None of this likely moved the dial enough to change anyone's overall market view but, after an initial bounce, the profit-taking resumed and the stock market closed lower again for a third consecutive day of losses and rounding off its worst week since early March.
I wanted to address a misconception that seems to be floating around out there, with the latest inflation figures due out this week (see THIS WEEK’S UPCOMING CALENDAR below) .. it’s important not to confuse disinflation with the idea that the price increases of the past several years will reverse, because they won’t. The longer people have to pay these prices, the more it chips away at excess savings and excess spending, potentially resulting in a spending slowdown in the not-too-distant future which could ultimately damage stock returns. It will be a slow burn though, indeed almost imperceptible.
Disinflation is definitely a positive, but it’s important not to confuse the decline in inflation with the idea that prices are about to drop and give us all some relief. They are not and the best we can hope for is that they simply stop going up as much as they have done.
OTHER NEWS ..
Higher Interest For Your Cash .. Last week saw at least two of the major high yield savings platforms raise their rates for depositors even higher, so I updated my recent article about them, which you can read here, to reflect the new rates and FDIC/SIPC insurance coverages.
Marked Down .. The US was stripped last week of its top-tier sovereign credit rating by Fitch Ratings (see EXPLAINER: FINANCIAL TERM OF THE WEEK below), echoing a move last made more than a decade ago by Standard & Poors. The credit assessor downgraded the US down from it’s highest AAA grade to AA+.
The move was clearly a dressing down for US politics as it comes in the wake of major congressional battles over the nation’s borrowing and repeated politically-driven standoffs over raising the debt limit. While the most recent legislative impasse was quite swiftly resolved, it remains a potential issue of concern going forward particularly in an era when shameless political stunts in Congress in support of extremist political agendas are becoming the norm and have eroded confidence in the US government’s ability to show adequate fiscal management.
Only nine countries now hold the highest credit rating at all three major agencies (S&P Global Ratings, Fitch and Moody’s Investors Service); Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore and Australia. Canada (and now the US) is rated AAA by two out the three.
Fixed Rates Make Life Tricky For The Fed .. Only 11% of US household debt has an adjustable interest rate. That means that the many millions of Americans locked into existing fixed rate mortgages/auto loans/student loans have quite simply not been impacted by the Fed’s year plus campaign of rate hikes. And millions more have paid off these debts already or never had them and are also left unaffected.
This is what can make the Fed’s job difficult as raising interest rates is a blunt tool and drawing a straight line between interest rates, consumer spending and the rate of inflation is not always easy.
Who does it really hit when interest rates rise? Those with adjustable-rate debt like credit cards. The average interest rate on credit card debt continues to rise, recently hitting a record high of 20.7%. Also hurt are those in the market for a new asset purchase that is not accompanied by a sale that often requires financing, like first-time buyers of homes and cars.
Prices and borrowing costs of these assets have rocketed in tandem. The median price of a “starter home” in the US is 46% higher than 2019 levels. The monthly mortgage payment needed to purchase one of these homes has more than doubled over that time.
UNDER THE HOOD ..
On the charts, the S&P 500 index SPX (which closed on Friday at 4478) failed again at the strong resistance level at 4585 and then promptly fell hard. The next upside resistance is at 4536, 4555, 4585 and 4605. All downside support levels were broken last week - the next ones are at 4468, 4451 and 4385.
The Percent of Stocks Within 2% of Their One Year Highs has been expanding nicely recently but slipped a little a couple of weeks ago, providing evidence of investors beginning to take profits in their winners, while rotating into those that remain much further off their highs. We can see this with the Percent of Stocks 20% or More Below Their One Year Highs falling fast to a new 52-week low of below 29% at the end of July.
All this paints a picture of investors are taking profits in their Large Cap winners and rotating into more attractively-priced value-oriented sectors and Small Caps. Although the short term effect can be a hit to the major indexes - as we saw last week, this is also part of the healthy rotation now underway as prior leaders, including the growth sectors, take a breather. Other economically sensitive areas are now bubbling up to the top of the list in terms of Demand growth and participation.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Earnings season keeps on rolling this week. We’ll also get key inflation readings that will help inform the Fed’s next interest rate decision in September.
Disney, Alibaba, Eli Lilly, UPS, News Corp, Ralph Lauren, BioNTech, Paramount Global, Wynn Resorts, Palantir Technologies, Illumina, Take Two Interactive, Barrick Gold and Brookfield are among the earnings highlights.
The Consumer Price Index (CPI) measure of retail inflation for July comes out on Thursday. The estimate is for a 3.3% year over year increase and the closely-watched core number to increase by 4.8%. This will be followed on Friday by the latest Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 0.6% for the week.
Last week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - down 4.6% for the week.
The proprietary Lowry's measure for US Market Buying Power is currently at 164 and fell by 9 points last week and that of US Market Selling Pressure is now at 123 and rose by 12 points over the course of the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest US companies. It remains above its 50-day and 90-day moving averages and above its long term trend line, with a RSI of 48***. SPY ended the week 6.5% below its all-time high (01/03/2022).
IWM, the Russell 2000 Small Cap ETF, is made up of the bottom two-thirds in terms of company size of the group of the 3,000 largest US stocks. It remains above its 50-day and 90-day moving averages and above its long term trend line, with a RSI of 55***. IWM ended the week 20.0% below its all-time high (11/05/2021).
*** RSI (Relative Strength Index) above 70: technically overbought, RSI below 30: technically oversold
The VIX, the commonly-accepted measure of expected upcoming stock market risk and volatility (often referred to as the “fear index”) implied by S&P 500 index option trading, ended the week 2.3 points higher at 15.9. It is now above its 50-day and at its 90-day moving averages and below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
6.90%
(one week ago: 6.81%, one month ago: 6.71%, one year ago: 4.99%)
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with a sense of “FOMO” and investors chasing rallies in an excessively risk-on environment, possibly leaving the market vulnerable to a sharp downward correction at some point.
Data courtesy of CNN Business.
US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 49% (45% a week ago)
⬌ Neutral: 30% (31% a week ago)
↓Bearish: 21% (24% a week ago)
Net Bull-Bear spread: ↑Bullish by 28 (Bullish by 21 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE PREDICTION TOOL ..
What are the latest market expectations for what the Fed will announce re: interest rate changes (Fed Funds rate, currently 5.375%) on September 20th after its next meeting?
⬌ No change .. 87% probability
(one week ago: 80%, one month ago: 74%)
↑ 0.25% increase .. 13% probability
(one week ago: 20%, one month ago: 18%)
Where will interest rates (Fed Funds rate, currently 5.375%) be at the end of 2023?
↓ Lower than now .. 9% probability
(one week ago: 9%, one month ago: 15%)
⬌ Unchanged from now .. 67% probability
(one week ago: 62%, one month ago: 52%)
↑ Higher than now .. 24% probability
(one week ago: 29%, one month ago: 33%)
Data courtesy of CME FedWatch Tool. Calculated from Federal Funds futures prices as of Friday.
US TREASURY INTEREST RATE YIELD CURVE ..
The interest rate yield curve remains “inverted” (i.e. shorter term interest rates are generally higher than longer term ones) with the highest rate (5.54%) being paid currently for the 3-month duration and the lowest rate (4.05%) for the 10-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year fell to 0.73% from 0.90%, indicating a flattening of the inversion of the curve during the last week.
Historically, an inverted yield curve has been regarded as a leading indicator of an impending recession, with shorter term risk deemed to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
The curve has been inverted since July 2022 based on the 2 year vs. 10 year spread.
Data courtesy of ustreasuryyieldcurve.com as of Friday.
ARTICLE OF THE WEEK ..
Using margin to buy stocks is just not a good idea.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
Fitch ratings is a credit rating agency that rates the viability of investments relative to the likelihood of default.
Fitch is one of the top three credit rating agencies internationally, along with Moody's and Standard & Poor's.
Fitch uses a letter system; for example, a company rated AAA is very high quality with reliable cash flows, while a company rated D has already defaulted.
Fitch Ratings is an international credit rating agency based out of New York City and London. Investors use the company's ratings as a guide as to which investments will not default and subsequently yield a solid return. Fitch bases the ratings on factors, such as what kind of debt a company holds and how sensitive it is to systemic changes like interest rates.
Along with Moody's and Standard & Poor's (S&P’s), Fitch is one of the top three credit rating agencies in the world. The Fitch rating system is very similar to that of S&P in that they both use a letter system.
The Fitch rating system is as follows:
Investment grade
AAA: companies of exceptionally high quality (established, with consistent cash flows)
AA: still high quality; still has a low default risk.
A: low default risk; slightly more vulnerable to business or economic factors
BBB: a low expectation of default; business or economic factors could adversely affect the company
Non-investment grade
BB: elevated vulnerability to default risk, more susceptible to adverse shifts in business or economic conditions; still financially flexible
B: degrading financial situation; highly speculative
CCC: a real possibility of default
CC: default is a strong probability
C: default or default-like process has begun
RD: issuer has defaulted on a payment
D: defaulted
Fitch offers sovereign credit ratings that describe each nation’s ability to meet its debt obligations. Sovereign credit ratings are available to investors to help give them insight into the level of risk associated with investing in a particular country. Countries will invite Fitch and other credit rating agencies to evaluate their economic and political environments and financial situations to determine a representative rating. It’s very important to obtain the best sovereign credit rating possible, particularly in the case of developing nations, as it aids in accessing funding in international bond markets.
In 2018 Fitch awarded the United States with the highest AAA sovereign credit rating before moving in down to AA+ last week. On the lower end was Brazil with a BB-.
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