Last week saw the end of the month, Q2 and H1. As I will summarize next week in my Q2 Quarterly Report, stock indexes broadly did ok over these periods, but last week confirmed that some two-way volatility is creeping into the Mega Tech names that have carried this eight month rally. The highlights of the week were always going to be the presidential debate and some big inflation data on Friday, but I’m not sure the needle moved much.
A broadly sluggish session to start the week on Monday was characterized mainly by a continued deepening price deterioration in the recent “darling” risk assets of AI stocks and crypto. Nvidia (NVDA) plunged again to reach a 13%+ correction, shedding $430 billion in value in just three trading days (that’s more than the entire value of Mastercard!) - but 70% of the Large Cap S&P 500 stocks actually moved higher on the day. This further exposed the divergence that I’ve been referencing in this report for months. Bitcoin had its worst day in years. Even the hottest trades are not one-way bets.
In a complete reversal of fortunes on Tuesday, there was a solid rebound in AI and crypto, with NVDA recovering all of its Monday losses. Dip-buyers can take most of the credit. At the same time, big consumer names like Walmart, Nike and Home Depot all struggled on fears that the relentless level of Americans’ retail spending may be starting to top out.
Things stabilized somewhat on Wednesday with stock prices across the board drifting around aimlessly, despite decent earnings and outlook from Fedex (FDX), considered to be something of a proxy for the current state of economic conditions.
Thursday was another uneventful one ahead of the debate that evening and the important inflation data the next day. Mega Tech continued its recovery but Walgreens (WBA), a favorite of dividend stock hunters but recently booted from the Dow Jones Industrial Average index, got punished really hard after some very undistinguished quarterly results.
The excruciating first (and very possibly only) presidential debate on Thursday night simultaneously reduced and increased political uncertainty. On one hand, much of the doubt about the outcome of a Trump v. Biden head-to-head is now rapidly evaporating as a result of what we all saw on Thursday night. But the now somewhat more elevated sense that Biden is simply no longer a viable candidate, leading to a Trump v. ?? head-to-head, could inject a massive level of ambiguity into the process.
The week, the month, Q2 and H1 came to an end with something of whimper on Friday. Wall Street decided to, for the moment, put growing political volatility concerns on the shelf as something to worry about later, choosing instead to focus on the publication of the important Core Personal Consumption Expenditures (PCE) price index which increased just 0.1% for the month and showed that this measure of annualized inflation fell to 2.6%, the lowest reading since March 2021.
Wall Street’s response was something of a shrug, partially because the numbers mostly matched expectations and also because the major indexes are trading not far below all-time record levels and this data certainly wasn’t unexpectedly spectacular enough news to push anything meaningfully higher from there. In the end, we saw prices sink a little on pretty low volume.
There is an old adage on Wall Street that “Bull markets climb a wall of worry; bear markets slide down a river of hope.” The stock market, excluding select Mega Caps, remains in a corrective phase since mid-May which is still unresolved.
It is important to recognize that the top three stocks in the market: Microsoft (MSFT), Apple (AAPL), and Nvidia, now make up 20% of the weight of the entire S&P 500 Index and NVDA alone represents 20% of the Technology sector. Out of eleven sectors, only the Technology and Communication Services sectors are outpacing the YTD gains by the S&P 500 index.
In order to reignite broad demand and further gains in stock prices, Wall Street needs to have a more concrete sense of the Federal Reserve's first interest rate cut and some stability at least in U.S. consumer behavior that seems to turning negative. In order for stocks to rally from here, there needs to be a broadening out in the number of stocks fueling the gains.
There remains a lot of noise in this market about economic growth, inflation, earnings, the Fed, geopolitics and coming up soon, the election. But, for all the noise, the facts remain as such: The bullish mantra that has powered stocks higher since November of last year remains largely intact.
And as long as that remains the case, then the downside risks for this market should remain limited. That said, we should continue to be concerned about the rate at which growth is slowing, not so much because of any recession risk but instead because, at these price valuations, any significant moderation in growth is simply not built in.
OTHER NEWS ..
Beep, Beeeeep .. New York City had the world’s worst congestion for the second year in a row, costing the city an estimated $9.1 billion in lost time. In total, traffic congestion is estimated to have cost the U.S. over $70 billion. Other U.S. cities in the top ten include Chicago, Los Angeles and Boston. Mexico City ranked second on the list, followed by London and Paris.
Greed is Good .. The FTX bankruptcy was looking like a hedge-fund trade for the ages. Many of them were set to make hundreds of millions of dollars for intrepid vulture investors buying claims from impacted investors. Then things got messy. Hedge funds and other distressed investors rejoiced last month when bankruptcy managers said the corporate carcass of FTX, Sam Bankman-Fried’s collapsed crypto exchange, had enough assets to more than make its creditors whole.
Since FTX’s 2022 implosion, hedge funds had scooped up the rights to customers’ frozen accounts for pennies on the dollar, with five firms alone buying claims with a combined face value of about $2.4 billion. That meant a huge payday was in store. But, according to a Wall Street Journal article last week, many former FTX customers are abruptly reneging on deals and lawyering up after suffering from seller’s remorse.
The core problem underlying this is that FTX claim values have jumped as the prospect of a larger eventual payout has grown, thanks in part to a fierce rebound in crypto prices. That means many FTX clients who sold their claims quickly missed out on getting a better price later on or securing a direct payout from the FTX estate.
Highly Organized Forward Planners Rejoice! .. Disney’s Florida theme parks will let visitors reserve a space for shorter lines on rides as much as one week in advance, in an effort to address complaints about the process.
Disney hotel guests will be able to book ride reservations seven days ahead for their entire stay. Others can do so three days in advance. Presently park attendees can only book spots on the day of their visit, with many waking up at 7 a.m. to get first crack at them. The changes take effect July 24th.
ARTICLE OF THE WEEK ..
When investing is NOT like poker.
THIS WEEK’S UPCOMING CALENDAR ..
Stock and bond markets will close early on Wednesday and remain closed on Thursday in observance of Independence Day.
It’s an interrupted jobs week in the U.S. On Tuesday, we get the Job Openings and Labor Turnover Survey (JOLTS) report. It’s expected to show 7.9 million job openings on the last business day of May, which would be roughly 150k less from April.
Then we see the critical June Jobs Report on Friday. The consensus call is for 195k new payrolls created, after a 272k gain in May. The unemployment rate is forecast to stay at 4.0%.
In between on Wednesday, the Federal Open Market Committee will publish minutes from its recent mid-June meeting.
The first round of voting in the two-part French parliamentary elections takes place this weekend, possibly opening the door to a historic shift in the political and economic landscape in Europe.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil) - up 1.6% for the week.
Last week’s worst performing U.S. sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) for the second week in a row - down 1.6% 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 0.1% last week, is up 14.6% so far this year and ended the week 0.7% below its all-time record closing high (06/18/2024).
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 1.3% last week, is up 1.1% so far this year and ended the week 16.3% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.86%
One week ago: 6.87%, one month ago: 7.03.%, one year ago: 6.71%
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 meeting on July 31st?
Yes .. 10% probability (10% a week ago)
No .. 90% probability (90% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on September 18th?
Yes .. 64% probability (75% a week ago)
No .. 36% probability (25% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.875 (0.50% lower than where we are now, implying two rate cuts before the end of 2024)
One week ago: 4.875% (implying two rate cuts), one month ago: 5.125% (implying one rate cut)
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.
The 50-day moving average of the S&P 500 remains above the 200-day. This is a continued indication of an ongoing technical uptrend.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE ..
47% (234 of the S&P 500 stocks ended last week above their 50D MA and 266 were below)
One week ago: 52%, one month ago: 43%, one year ago: 65%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
68% (338 of the S&P 500 stocks ended last week above their 200D MA and 162 were below)
One week ago: 68%, one month ago: 64%, one year ago: 60%
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: 45% (44% a week ago)
⬌ Neutral: 27% (33% a week ago)
↓Bearish: 28% (23% a week ago)
Net Bull-Bear spread: ↑Bullish by 17 (Bullish by 21 a 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).
HIGH YIELD CREDIT SPREAD ..
3.21%
One week ago: 3.23%, one month ago: 3.15%, one year ago: 4.27%
This closely-watched spread is a strong indicator of the risk inherent in the professional marketplace and the extent to which such risk is growing or easing. The high-yield credit spread is the difference between the interest rates offered for riskier low-grade, high yield (“junk”) bonds and those for stable high-grade, lower yield bonds, including deemed risk-free government bonds, of similar maturity.
A reading that is high/increasing indicates that “junkier” bond issuers are being forced to move their yields higher to compensate for a greater risk of default and is considered to be a reflection of broadly deteriorating economic and market conditions which could well lead to lower stock prices.
A reading that is low/decreasing indicates a reduced necessity for higher yields. This reflects less prevailing market risk and more stable or improving conditions in the overall economy and for stock prices.
For context .. this reading was regularly below 3.00% for much of the 1990s, got as high as 10.59% after 9/11 and the subsequent Dotcom Crash of 2002, peaked at 21.82% in the Great Financial Crisis in December 2008 and spiked from 3.62% to 10.87% in the space of about a month during the February/March 2020 COVID crash. The historical average since 1996 is a little over 4.00%.
Data courtesy of: FRED Economic Data, St. Louis Fed as of Friday’s market close.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.38%) is being paid for the 3-month duration and the lowest rate (4.33%) is for the 5-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year fell from 0.45% to 0.35%, indicating a flattening in the inversion of the curve last week.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. The lightly shaded area on the chart shows the current Federal Funds rate range.
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