Following the car crash of a presidential debate and an apparent outbreak of civil war in the Democratic party, Wall Street strategists and traders have already begun gaming out how an increasingly-likely Trump victory in November will look, especially as it was further enhanced by Monday’s Supreme Court decision on presidential immunity. As one analyst put it; “It’s still too soon to fully price in an election outcome, but probably not too early to leg into it”.
The sense is that a second Trump presidency would drive market interest rates higher on the back of the prospect of the widespread imposition of international tariffs feeding stagflation in the U.S., anticipated ballooning deficits and a President apparently intent on directly interfering in Fed interest rate policy.
Q3 and H2 began with a holiday-interrupted week on Monday and a return to what we have seen a lot of recently; Mega Tech performance papering over the cracks in the rest of the market. On the same day that the tech-heavy NASDAQ reached a new all-time record, three-quarters of the stocks in the S&P 500 moved lower.
As U.S. markets opened on Tuesday, the backdrop was rather miserable with European markets tumbling and oil prices near multi-month highs amid escalating tensions in the Middle East and hurricanes in the Atlantic, where Hurricane Beryl became the earliest-ever Category 5 storm in the area.
The Job Openings and Labor Turnover Survey (JOLTS) showed open job positions increased to 8.14 million from a downwardly-revised 7.92 million reading in the prior month. That was somewhat higher than expected and could therefore be perceived as a small speed bump on the road to imminent interest rate cuts.
However, Mega Tech continued to backstop the rest of the market and the indexes moved moderately higher with the S&P 500 and NASDAQ both closing once again at all-time record highs in a low volume session that had one eye on Friday’s critical Jobs Report.
Wednesday was a half-day in advance of the July 4th holiday and the focus remained on the potential back-to-back fireworks, real ones at the following day’s celebrations and then possible metaphorical ones with Friday’s employment info. Predictably, the abbreviated session was something of a snoozer but even that couldn’t prevent marginal new record highs being reached yet again.
Following Thursday’s holiday, during which there was a strong intensification of the doubts surrounding Biden’s viability as a realistic presidential candidate, Wall Street trading desks operated with mostly skeleton crews on Friday even though probably the most important economic data point of the month, the Jobs Report, was released before the opening bell.
We learned that the U.S. added another 206k jobs last month, a bit more than had been expected, but there was a downward revision for the two previous months. The revisions helped bring the three-month average down to +177k, the slowest pace of job growth since January 2021 by that measure. The rate of unemployment slightly surprisingly ticked up to 4.1% and average hourly earnings were up +3.9% in June from a year earlier, marking their smallest gain since 2021.
This all seems to have confirmed Wall Street’s view that the economy is slowing, but not in a drastic way that would prompt more aggressive rate cuts. A hot labor market makes it more difficult to lower interest rates but there likely wasn’t anything in the report to lead Fed officials to push for a July rate cut. September, however, is still very much on the table (see FEDWATCH INTEREST RATE TOOL below).
Friday’s thinly-populated stock market was moderately impressed and we saw a Goldilocks extension of the rally on rising hopes of that September rate cut, which of course generated more new record highs for the S&P 500 and the NASDAQ.
Attention turned towards a potentially consequential upcoming several days in U.S. politics with a Biden ABC interview airing that night and an apparently growing group of Democratic lawmakers, donors and party activists getting louder and louder about the need for a change of candidate, especially as more states now seem poised to slip into battleground territory. Electoral politics was also rumbling in the background elsewhere in the world (see below).
Also on Wall Street’s mind in the upcoming days will be the fact that the Q2 earnings season begins this week with the traditional curtain-raiser of results from the big banks and we’ll get some more critical inflation data (see THIS WEEK’S UPCOMING CALENDAR below).
OTHER NEWS .. OVERSEAS ELECTIONS EDITION
While the November election here has suddenly rushed to the front of the news agenda in the last week or so, the UK and France are at the end of their electoral campaign cycles.
Former British Prime Minister Rishi Sunak was brutally booted from power as voters mercilessly punished his scandal-ridden center-right Conservative Party, which suffered a historic thrashing after more than 14 years in power. This was only the second change of government in the country in 27 years.
The new UK PM is Sir Kier Starmer, the leader of the center-left Labour Party which consigned the Conservatives to the worst defeat in their entire history (the party was founded in 1834), with a record-breaking number of senior cabinet ministers (and also former Prime Minister Liz Truss) losing their parliamentary seats and now out of a job. Another record set in this election was the number of votes cast for other smaller parties, some of them with much more extremist agendas, beyond the traditional duopoly of Conservative and Labour.
Unlike in the United States, the leader of the winning party in a UK election takes over as Prime Minister immediately, within hours of the result being determined. Local financial markets had long ago priced in this landslide Labour victory and there was very little immediate reaction.
Meanwhile, on the other side of the English Channel, centrist French President Emanuel Macron’s enormous gamble to call early parliamentary elections when he didn’t have to has been variously described as “an incomprehensibly rash decision” and “playing Russian Roulette with the fate of the nation”. It appears to have massively backfired. In the second and decisive poll this weekend, it seems likely that the far-right National Rally party of Marine LePen will come out on top, maybe even with an outside chance of a working majority in the French parliament, which would install 28 year-old Jordan Bardella as Prime Minister. Results are expected to be confirmed tonight.
The French political system allows for “cohabitation” between a President and an ideologically-opposed Prime Minister and there are still three years left until the next scheduled Presidential election. Local financial markets have been very jittery, uncertain about National Rally’s economic agenda and fearing the political gridlock that may result from a cohabitation outcome with Macron effectively becoming a lame duck President for a very extended period of time.
ARTICLE OF THE WEEK ..
Two-thirds of existing mortgages with <4% interest rates. $100k income households only being able to afford 37% of home listings (normally 62%) ..Welcome to America’s frozen, broken housing market.
THIS WEEK’S UPCOMING CALENDAR ..
U.S. inflation data and the first handful of Q2 earnings reports will be the highlights this week. Federal Reserve Chairman Jerome Powell, will sit for two days of testimony before lawmakers.
The latest earnings season kicks off this week with results incoming from JPMorgan Chase, Wells Fargo, Citigroup, Bank of New York Mellon, PepsiCo and Delta Air Lines.
The economic-data highlight of the week will be the Consumer Price Index (CPI) measure of retail inflation for June. The consensus estimate calls for a +0.1% increase during the month, after the index was unchanged in May. The important Core reading, is expected to be up +0.2% month-over-month. We will also get to see the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers in June.
Powell will deliver his semi-annual Monetary Policy Report to Congress this week. He'll start on Tuesday before the Senate Committee on Banking, before moving to the House Financial Services Committee on Wednesday. Wall Street will be listening carefully to what he has to say.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - up 3.4% for the week.
Last week’s worst performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 1.2% for the week.
SECTOR DASHBOARD:
Sector Dashboard courtesy of The Sevens Report, data valid as of early last 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 1.7% last week, is up 16.7% so far this year and ended the week at its all-time record closing high (07/05/2024).
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 fell 0.2% last week, is up 0.1% so far this year and ended the week 17.2% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.95%
One week ago: 6.86%, one month ago: 6.99%, one year ago: 6.81%
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 .. 8% probability (10% a week ago)
No .. 92% probability (90% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on September 18th?
Yes .. 77% probability (64% a week ago)
No .. 23% probability (36% 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: 4.875% (implying two 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.
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 ..
43% (219 of the S&P 500 stocks ended last week above their 50D MA and 281 were below)
One week ago: 47%, one month ago: 48%, one year ago: 76%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
65% (323 of the S&P 500 stocks ended last week above their 200D MA and 177 were below)
One week ago: 68%, one month ago: 69%, one year ago: 62%
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: 42% (45% a week ago)
⬌ Neutral: 32% (27% a week ago)
↓Bearish: 26% (28% a week ago)
Net Bull-Bear spread: ↑Bullish by 16 (Bullish by 17 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 ..
3.25%
One week ago: 3.21%, one month ago: 3.20%, one year ago: 3.99%
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 (5.53%) is being paid for the 2-month duration and the lowest rate (4.22%) 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 0.35% to 0.32%, 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.
WWW.ANGLIAADVISORS.COM | SIMON@ANGLIAADVISORS.COM | CALL OR TEXT: (646) 286 0290 | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
This material represents a highly opinionated assessment of the financial market environment based on assumptions and prevailing data at a specific point in time and is always subject to change at any time. Although the content is believed to be correct at the time of publication, no warranty of its accuracy or completeness is given. It is never to be interpreted as an attempt to forecast any future events, nor does it offer any kind of guarantee of any future results, circumstances or outcomes.
The material contained herein is not necessarily complete and is wholly insufficient to be exclusively relied upon as research or investment advice or as a sole basis for any investment or other financial decisions. The user assumes the entire risk of any decisions made or actions taken based in whole or in part on any of the information provided in this or any Anglia Advisors communication of any kind. Under no circumstances is any of Anglia Advisors’ content ever intended to constitute tax, legal or medical advice and should never be taken as such. Neither the information contained or any opinion expressed herein constitutes a solicitation for the purchase of any security or asset class. No advice may be rendered by Anglia Advisors unless or until an executed Client Engagement Agreement is in place.
Posts may contain links or references to third party websites or may post data or graphics from them for the convenience and interest of readers. While Anglia Advisors might have reason to believe in the quality of the content provided on these sites, the firm has no control over, and is not in any way responsible for, the accuracy of such content nor for the security or privacy protocols that external sites may or may not employ. By making use of such links, the user assumes, in its entirety, any kind of risk associated with accessing them or making use of any information provided therein.
Those associated with Anglia Advisors, including clients with managed or advised investments, may maintain positions in securities and/or asset classes mentioned in this post.
If you enjoyed this post, why not share it with someone or encourage them to subscribe themselves?
