The surprising outcome of the French parliamentary elections the previous day, where the left, centre and right all essentially cancelled each other out to create a legislative power vacuum and potential political deadlock in France for years to come, caused nervousness and volatility in European markets on Monday, which continued for much of the week.
With such a big slate of upcoming potential catalysts; Fed chairman Jerome Powell talking in Congress for two days starting the next day, big inflation data coming out on Thursday and Friday, French election fallout and Q2 earnings season kicking off (and all of this with the potential to be overshadowed at any moment by a potential intensity spike in the Biden candidacy psychodrama), it was perhaps not surprising that traders in the U.S. weren’t willing to place any large bets to start the week and stock prices basically flatlined all day.
All eyes were on Washington DC on Tuesday, where Powell began facing two days of questions from mostly financially illiterate, grandstanding lawmakers in Congress. Wall Street tried to pick out any signals about the timing of future interest rate cuts from his words, but was mostly unable to do so other than from his bland familiar refrain that the Fed still needs “more good data” to strengthen the case that inflation is moving toward the central bank’s 2% target.
In the end, a nothing-burger came out of DC during the session and stock prices barely budged for the second day in a row, even though the S&P 500 and NASDAQ indexes still managed to sleepwalk themselves to marginal new all-time highs yet again.
Stocks began Wednesday in a buoyant mood with overnight reflection on Powell’s testimony having pushed the narrative further in the direction of a September interest rate cut (and maybe - just maybe - a shock cut later this month?). The optimism only accelerated as the day went on, with the S&P 500 closing above 5600 for the first time ever for its 37th all-time record high of the year. The NASDAQ joined in on the fun, reaching its 27th high. Importantly, the gains were broad-based across all market capitalizations, sectors and countries.
The latest Consumer Price Index (CPI) measure of retail inflation which was released pre-market on Thursday was pure Goldilocks. Prices actually fell in June, down -0.1% for an annualized inflation rate of +3.0% (the lowest since April 2021) and the Core (ex-food and energy) number to +3.3%. Importantly, under the hood, we saw a lot of price calming in important categories like housing and food which seem to have finally turned the corner and even insurance costs stabilizing. All of this was better than expected.
You would have thought that Wall Street would go into some kind of exuberance overdrive. But reality intervened when markets opened. The first few earnings reports of the Q2 season from the likes of Delta Airlines and PepsiCo were disappointing. Also, the market-driven probability of a rate cut in September had already run a lot higher to more than 80% before the CPI release and has now been pretty much priced in - ending the week at 94% (see FEDWATCH INTEREST RATE TOOL below).
While the recently-struggling Small Cap indexes had a really good day on the back of rate cut optimism, the S&P 500 was hit by a severe bout of profit-taking and Mega Cap exhaustion concerns and the index fell quite heavily in spite of the fact that a lot more of its component stocks moved higher than lower. This implied a investor rotation from the recent winners to recent laggards.
This process was accelerated by nervousness surrounding social networks Meta/Facebook, Snap, Pinterest and Nextdoor as European Union regulators charged Elon Musk's X/Twitter with breaching its online content law and potentially liable for fines equating to 6% of its global revenue.
The afore-mentioned intensity spike in the Biden psychodrama came to pass on Friday after his horrendous, gaffe-ridden Thursday night. We also learned pre-market of a somewhat hotter-than-expected Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers and some mixed earnings from some of the big banks. With increasing difficulty, Wall Street continued to shrug off looming political uncertainty and managed to focus on improving interest rate cut prospects and stocks shifted solidly higher across the board with the indexes more than recovering all the previous day’s losses.
As if any more was needed, the Trump assassination attempt on Saturday has injected further drama and uncertainty into what is becoming a tumultuous election campaign, even four months out from polling. Wall Street may not be able to ignore it much longer.
Notwithstanding the last couple of days’ price action, the issue of the lack of breadth associated with the rally continues to be somewhat troublesome, given the recent performance canyon between Mega Cap and mostly AI-related stocks and the other 99% of the investable stock universe. Only 22% of S&P 500 components are performing as well as the index this year (historically a very low number) and seven of the eleven S&P 500 sectors recently fell to 52-week lows relative to the record-busting S&P 500 index itself. The longer this selectivity and discriminating demand exists, the greater the risk it ultimately poses to the rally.
Evidence of the slowing momentum of the US economy has shifted from anecdotal to data-driven in the last few weeks. The question now becomes; how fast is it slowing? The response is absolutely critical quite simply because a severe economic contraction will end this nine-month old bull market and could well reverse it, since it will likely disproportionately damage the prices of the stocks that been on a rocket-ride as the rally’s main drivers.
To be absolutely clear, I am not saying that such a contraction is going to happen. Right now, it is not happening. Jumping directly in front of a fast-moving freight train is always a foolish idea, price takes precedent at the end of the day and the dominant uptrend and market momentum needs to be highly respected.
What I am saying is the stock market at current valuations is not even acknowledging the possibility that a severe economic contraction could happen. And that is at least noteworthy and potentially concerning.
Just because storm clouds may be gathering on the horizon, it does not necessarily mean that a storm will hit us. It does mean, however, that we need to continue to monitor conditions closely to avoid being possibly blindsided.
OTHER NEWS ..
Does The Outcome Of A Presidential Election Matter To Stock Markets? .. The data says that it doesn’t. The S&P 500 rose 60% under Trump and has risen 60% under Biden. The index increased about 200% under each of the very different two-term presidencies of Reagan and Obama.
As for presidential campaigns, the only year before 2024 where there was significant market volatility in the final weeks going into an election since the 1950s was in 2008 when there was obviously a lot of other financial market stuff going at that time, to say the very least! Recent events, however, suggest that the 2024 campaign may be far more turbulent than usual and could create at least short term volatility if even more chaotic dominos start to fall.
Getting Into It .. Americans are playing the stock market in record numbers, with almost three in five investing in stocks, according to a Charles Schwab survey. Members of Gen Z start investing when they’re 19 years old on average compared with 32 years old for Gen X and 35 years old for Baby Boomers. Sports betting has also exploded, with Americans wagering more than $220 billion in the past five years, according to the American Gaming Association. Stock trading seems to be becoming interchangeable with the online betting in the sports world.
Don’t Mess With Texas? .. Against the traditional advice from the locals, Hurricane Beryl is severely messing with Texas and is comfortably coming out on top. The state’s power grid was no match for Beryl as millions lost electricity last week.
Exposed .. Private data of every AT&T mobile customer was exposed earlier this year in a massive hack, the company admitted last week. This is the second big hack suffered by the firm in the last twelve months. While it would appear that the most recently stolen data may not yet have been made public, this is clearly not a good look for AT&T or any of its security partners.
ARTICLE OF THE WEEK ..
THIS WEEK’S UPCOMING CALENDAR ..
Around fifty S&P 500 companies are scheduled to report their Q2 earnings this week, including Netflix, Goldman Sachs, Morgan Stanley, Blackrock, Bank of America, UnitedHealth Group, American Express, United Airlines, Johnson & Johnson, Prologis, Taiwan Semiconductor Manufacturing, Domino’s Pizza, D.R. Horton, Halliburton, SLB and ASML.
The main economic reports to watch for are Retail Sales data for June on Tuesday and the Leading Economic Index for June on Thursday.
The European Central Bank will announce its latest interest rate decision on Thursday and is widely expected to keep its target interest rate unchanged at 3.75%.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Real Estate (two biggest holdings: Prologis, American Tower) - up 4.4% for the week.
Last week’s worst performing U.S. sector: Communication Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - down 1.7% 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 0.9% last week, is up 17.8% so far this year and ended the week at its all-time record closing high (07/12/2024).
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 6.1% last week, is up 6.2% so far this year and ended the week 12.1% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.89%
One week ago: 6.95%, one month ago: 6.95%, one year ago: 6.96%
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 .. 7% probability (8% a week ago)
No .. 93% probability (92% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on September 18th?
Yes .. 94% probability (77% a week ago)
No .. 6% probability (23% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.625% (0.75% lower than where we are now, implying three 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:
69% (343 of the S&P 500 stocks ended last week above their 50D MA and 157 were below)
One week ago: 43%, one month ago: 48%, one year ago: 83%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
72% (361 of the S&P 500 stocks ended last week above their 200D MA and 139 were below)
One week ago: 65%, one month ago: 67%, one year ago: 69%
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: 49% (42% a week ago)
⬌ Neutral: 29% (32% a week ago)
↓Bearish: 22% (26% a week ago)
Net Bull-Bear spread: ↑Bullish by 27 (Bullish by 16 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 ..
3.18%
One week ago: 3.25%, one month ago: 3.19%, one year ago: 4.05%
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 (5.52%) is being paid for the 2-month duration and the lowest rate (4.10%) 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 0.32% to 0.27%, 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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