Last week’s big data points were mostly inflation-related with the release of CPI and PPI, but all of a sudden inflation is no longer the big issue it used to be. The trajectory is very much set and meaningful unexpected bombshells are considered rather unlikely, which was borne out in the data on Wednesday and Thursday.
There was also the small matter of the presidential debate, with both candidates beginning to finally tease some actual economic policies that will provide more daylight between them and on which Wall Street can begin to make some financial judgements and, of course, the ever-present potential for implosion by one or the other candidate.
Markets rebounded nicely on Monday following the anguish of the previous week. Buyers finally seemed confident enough to dip their toes back in and snap up stocks at perceived bargain prices, including - but not limited to - names in the heavily beaten-down tech space. However, Apple’s desperate attempts to make their rah-rah product launch event seem even slightly interesting or relevant failed dismally and the stock did not participate in the market rally.
Chinese stocks hit a five-year low in the Asian session on Tuesday. Ahead of the evening’s presidential debate, U.S. markets were on edge particularly the energy and banking sectors (negatively impacted respectively by oil prices flirting with three year lows and some lousy future profit and margin forward guidance from some of the big banks) but the S&P 500 and the NASDAQ indexes still managed to eke out moderate gains.
The presidential debate on Tuesday evening was all heat and zero light with more time spent talking about the apparently routine execution of new-born babies and the eating of cats and dogs on the streets of Ohio than on providing any kind of new information or clarity on either candidate’s economic plans. Wall Street rolled its eyes and quickly moved on to the first piece of inflation data that was released pre-market on Wednesday.
The Consumer Price Index (CPI) measure of retail inflation came out as expected with the headline annualized rate moving lower from 2.9% to 2.5%. Under the hood, housing/shelter is the largest component of the calculation and moved higher (which was a little concerning) as did air fares/hotels, but food/groceries were flat.
When you take the average annualized inflation rate over the last six months, it’s now basically at the Fed’s target rate of 2.0% and over the last three months it’s actually down as low as 1.1%. Inflation is clearly now under control and the IMO already rather flimsy case for a “jumbo” 0.50% interest rate cut faded, leaving a 0.25% lowering on Wednesday as the favored outcome.
After initial investor disappointment that the jumbo cut likely wasn’t going to happen, an impressive tech/AI-powered afternoon recovery in stocks put lots of green on the screen by the close.
An avalanche of data dropped before the opening bell on Thursday morning. The European Central Bank (ECB) cut local interest rates by 0.25% as expected and the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers mostly confirmed its CPI cousin’s benign findings, falling from an annualized 2.2% to 1.7%. Weekly Initial Jobless Claims also came in unchanged and as anticipated.
The stock market reaction was initially muted with some light gains but the rally gathered pace as the day went on as traders processed what was really very rosy inflation data and the impending interest rate cut and the indexes all finished substantially higher for a fourth straight day of gains.
The stock market scored a clean sweep for the week after finishing higher on Friday with the jumbo interest rate cut proponents getting a boost from a rather surprising Wall Street Journal report that apparently the 0.25% vs. 0.50% rate cut debate is still live at the Fed and the market-driven probability of the bigger cut rocketed higher from as low as 15% earlier in the week and it’s now pretty much a coin flip again which it will be. Small Caps were by far the biggest beneficiaries.
Despite (or in fact even because of) an excellent week for the indexes, the stock market still has a problem and it isn’t so much the economic growth rate, it’s high valuations relative to historical norms and the resulting risk asymmetry that I talked about last week. A soft landing still remains far more likely than a hard landing, but Wall Street remains way too optimistic for the existing growth reality, not because that reality is so bad, but instead because current valuations are so stretched.
The economic environment is deteriorating but is not yet “nasty.” However, the stock market isn’t priced for a “just ok” environment, it’s priced for a spectacularly good one and that disconnect remains a near-term risk for investors.
OTHER NEWS ..
Euro Losers .. Apple lost its court fight over a $14.4 billion invoice for back taxes in Ireland and Google lost its challenge over a $2.7 billion fine for abusing its market power in a big win for the European Union’s crackdown on big tech. The court decisions are victories for EU antitrust chief Margrethe Vestager just weeks before the end of her second term. The Apple decision was by far the biggest in her decade-long campaign for tax equivalence and fairness in the EU, which has also targeted the likes of Amazon.
Who’s Buying My House? .. Businessman Leo Kryss is suing real estate company Douglas Elliman over the $79 million sale of his Florida mansion, a 7-bedroom, 11.5-bathroom home in Miami, FLA to Amazon founder Jeff Bezos, one of the world’s richest people.
Kryss claims that he asked Douglas Elliman CEO Jay Parker point-blank if Bezos was behind the purchase. Parker allegedly "misleadingly assured Kryss that Bezos was not behind the offer and was not the purchaser," according to the lawsuit. Clearly, the seller thinks that, had he known that Bezos was the buyer, he could have held out for a higher price.
It’s Baaaaaack! .. I literally cannot believe that this topic is rearing its extraordinarily ugly head again but a government shutdown on September 30th is back on the table. House Speaker Johnson canceled a planned vote on Wednesday on a stopgap government funding measure after facing opposition from fellow Republicans.
The proposal would have extended government funding through March 28th and avoided, at least temporarily, a partial government shutdown just weeks before the general election. Johnson was aiming to kick the spending bill ahead six months, when funding levels could be decided under a new administration and a new Congress.
Numerous lawmakers raised objections to the measure, which attached a requirement that people have to show proof of U.S. citizenship to vote. That requirement was almost certain to doom the bill in the Senate, where Democrats hold a majority. Republicans resisted Johnson’s bill either because it didn’t cut spending or because Trump instructed members to refuse to pass any government funding that did not include some kind of a list of measures on what he calls election security. This could run and run.
ARTICLE OF THE WEEK ..
Who are more despicable? The online scammers or the social media platform providers that aid and abet them, earning billions of dollars as a result? Why do we still put up with this shit?
Maybe more importantly, how long should the FBI put up with it before they start raiding the headquarters of the likes of Meta/Facebook, X/Twitter etc. and start holding senior executives liable?
THIS WEEK’S UPCOMING CALENDAR ..
Bring on the Fed! The highly anticipated interest-rate decision by the Federal Reserve will be this week's highlight. Policymakers have signaled they will cut rates at this meeting, which ends on Wednesday afternoon, but there remains uncertainty about whether it will be by a quarter of a percentage point or by a half point (see above).
Importantly, officials will also present their latest quarterly “Dot Plot” with their updated economic and interest rate projections for the coming months and years.
We will also get Retail Sales data for August. Those are forecast to be relatively unchanged during the month. And on Friday, the Bank of Japan is expected to keep its benchmark interest rate target unchanged at 0.25%.
There’ll be a small handful of earnings reports this week including from Fedex, General Mills and Lennar.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Technology (two biggest holdings: Nvidia, Microsoft) - up 8.0% for the week.
Last week’s worst performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 0.4% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price rose 3.9% last week, is up 18.2% so far this year and ended the week 0.5% below its all-time record closing high (07/16/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price rose 4.4% last week, is up 8.0% so far this year and ended the week 10.6% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.20%
One week ago: 6.35%, one month ago: 6.48%, one year ago: 7.18%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
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 of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, 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 possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now after the Fed’s next meeting on September 18th?
Yes .. 100% probability (100% a week ago)
No .. 0% probability (0% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.125% (1.25% lower than where we are now, implying five 0.25% rate cuts before the end of 2024)
One week ago: 4.125% (implying five rate cuts), one month ago: 4.375% (implying four rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE:
72% (359 of the S&P 500 stocks ended last week above their 50D MA and 141 were below)
One week ago: 58%, one month ago: 59%, one year ago: 32%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
73% (367 of the S&P 500 stocks ended last week above their 200D MA and 133 were below)
One week ago: 67%, one month ago: 68%, one year ago: 47%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 40% (45% a week ago)
⬌ Neutral: 29% (30% a week ago)
↓Bearish: 31% (25% a week ago)
Net Bull-Bear spread: ↑Bullish by 9 (Bullish by 20 week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
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