Reuters, Bloomberg and the Wall Street Journal all published articles last weekend essentially saying that the Fed is done with interest rate hikes and while that’s hardly new news, it helps counter some of the somewhat negative narratives that are emerging as investors step back to assess the state of the economy and the business cycle looking towards the end of the year.
It’s leading to an increasingly popular stance among traders and investors of “strongly neutral” on stocks and bonds as markets seem to be lacking any faith in pushing things in either direction. Being strongly neutral does not imply no opinion - you do have an opinion; it is that you have no strong conviction at the moment to buy or sell.
There is a recognition that there could be some legitimate negative surprises lurking. A few examples ..
Energy costs are one of the big wild cards that the economy is facing right now. Sustained high energy prices could cause a significant reversal in headline inflation (although not core), forcing the Fed to take more aggressive action than stock markets are prepared for. Gasoline at a national average of $4 a gallon seems to be the threshold where energy prices start to become a more serious drag on consumer spending in general. Oil prices have surged almost 30% since the end of June.
The United Auto Workers (UAW) union began an unprecedented and targeted strike at Detroit's big three automakers (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) – General Motors (GM), Ford Motor (F), and Stellantis (STLA) on Friday, but then promptly announced that they expected to be back at the negotiating table again at the weekend. A prolonged strike has the capability to raise auto prices, significantly harm suppliers and could send shock waves throughout the overall economy.
There are continued and growing worries about a government shutdown on September 30th as the small but loud rabble of Congressional trouble-makers show no signs of developing any degree of financial or economic intellect whatsoever as the deadline nears. They are instead furiously handing House Speaker Kevin McCarthy the bill for the price of his chaotic selection earlier in the year when he won only by making a multitude of promises to all corners of his party.
Last-minute fears of a maybe hotter-than-expected report of the Consumer Price Index (CPI) measure of retail inflation the following day was a drag on tech stocks on Tuesday. The CPI data can impact all of the Three Pillars Of The Rally (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes). It also didn’t help the tech sector that the legal problems of Alphabet Google (see OTHER NEWS below) were front and center that day and Apple’s “big product event” was mostly met with a very unimpressed yawn, failing to divert attention away from the company’s potentially serious issues in China.
When the data was released on Wednesday morning, we learned that CPI rose 0.6% from July to August, the largest month-to-month jump since June 2022. Gas prices, which surged 10.6% over that time, were responsible for more than half of the increase. The headline rate of inflation is now 3.7% annualized, up from 3.2% a month ago. But more importantly, Core CPI, which excludes the more volatile food and energy price components, only rose 0.3% in the last 30 days and 4.3% over the last year, a little lower than expectations.
Markets decided that, despite the fact that the inflation genie is not yet back in the bottle, all this CPI data essentially cancelled itself out and that this was basically a nothing-burger. Stock prices just churned sideways for the most part on Wednesday.
The probability of no change in interest rates at next week’s Fed meeting ticked up to a virtual certainty at 99% (see FEDWATCH INTEREST RATE PREDICTION TOOL below), although the odds of a hike at the November meeting did inch a touch higher.
Things are not the same in Europe where stagflation (economic contraction combined with still-high inflation) is becoming a real risk and the European Central Bank (ECB), was last week forced to raise interest rates for the tenth consecutive meeting by another quarter of a percent.
When it came out the next day, CPI’s wholesale cousin, the Producer Price Index (PPI) measure of wholesale inflation faced by manufacturers confirmed the stubbornness of higher prices but with the caveat that a lot of it was down to the possibly temporary impact of higher oil prices and that the Core inflation measures were still progressing quite well in a downward trajectory.
Retail sales also rose by more than expected, Thursday’s data emphasized the refusal of the American consumer to roll over - but since it is measured in dollars spent, some of this can again be put down simply to forced higher spending at gas pumps around the country.
Still, markets were impressed and Thursday saw a nice spike in stock prices, before then giving it all back again on Friday as a huge futures and options expiration exacerbated renewed fears about industrial conflict and the looming possible government shutdown and it ended up being a losing week for stock indexes albeit on very low trading volume, particularly the NASDAQ and tech and tech-adjacent sectors.
There is one more lurking problem under the surface that could bring a sudden end to the seemingly endless consumer spending boom. By the Fed’s own statistics, and backed up by a recent JP Morgan report, Americans have now pretty much spent all the excess savings they had built up during the COVID era from the combination of government stimulus and their inability to spend for months on end.
Over the last couple of years, these excess funds have acted as a buffer to help shield consumers and the economy in general from the damaging effects of high inflation and maintained a eye-poppingly high level of consumer spending month after month. That buffer is now probably gone and if the Three Pillars start to noticeably deteriorate, there is far less protection against a significant and rapid downturn in economic conditions and therefore stock prices.
OTHER NEWS ..
NYC Rents Finally Cooling Off?.. Manhattan’s rental market is showing signs of hitting a limit as prices in August plateaued during what’s typically the most expensive time of the year for new tenants, as reported by Bloomberg. The median rent for new leases signed last month was $4,400, unchanged from the record set in July. The steadiness suggests that renters have reached a breaking point after rents climbed 7.3% from a year ago and are up 35% from August 2021.
August is often the peak of the leasing season, with renters looking to move in before the school year starts. But it ended up being a slower month compared with May and June. The number of new leases in August dropped 14% from a year earlier.
The number of available apartments shrunk from July, suggesting that renters are choosing to renew leases rather than braving the market to find a new place to live. Last month, 11% of leases were signed after bidding wars compared with 19% a year earlier.
In Brooklyn, rents also appear to have peaked. The median price was $3,850 in August, $100 less than a month earlier. The number of new leases fell more than 40% from a year earlier.
Google In The Dock .. Google parent Alphabet (GOOGL) was put on trial in Washington DC last week on Justice Department charges that it violated anti-trust laws. The government’s case in the civil trial focuses on Google’s search practices and whether the company used illegal agreements to cut out competitors, harming consumers and advertisers in the process. The case is expected to last until mid-November.
Mexico Is The New #1 .. US-China tensions are rewiring global trade as the US seeks to reduce supply-chain reliance on geopolitical rivals and source imports closer to home. Mexico looks better placed than almost any other country to seize the business opportunities being created by this new Cold War.
It has just overtaken China as the biggest supplier of goods to the U.S., it boasts the world’s strongest currency this year and its stock markets is one of the best-performing. Foreign direct investment is already up more than 40% in 2023. Not since the signing of the North American Free Trade Agreement (NAFTA) in the 1990s has the country been as attractive to investors as it is right now.
UNDER THE HOOD ..
The S&P 500 index SPX closed on Friday at 4450, down a bit for the week. The next upside resistance points are to be found at 4510, 4530 and 4555. Downside support levels are at 4379, 4350 and 4328.
Last week, average trading volume on the New York Stock Exchange fell to a new 52-week low, which lessens the conviction behind whatever moves we are seeing. The August pullback appears to have morphed into a narrow trading range of the mid-4400s to the mid-4500s in the S&P 500 Index and it closed last week right at the bottom of that range.
The last time we saw a trading range like this with very light volume was in early June. Eventually, pent-up Demand took over to send the market higher, as the advance broadened from just the tiny group of Ultra Mega Cap tech stocks. The question for the current market is whether pent-up Demand or pent-up Supply is preparing to take over.
We can’t be sure yet, but there are some clues.There is growing evidence that longer-term indicators are going to be further challenged and it all starts with Small Cap health and performance which is not great right now with some apparently quite intense selling interest out there. A halt to the Small Cap slide would strongly encourage a potential recovery for the entire market. Without it, the dog days of August/September may stick around a while longer - but the preponderance of the technical evidence still points to an eventual resumption of the uptrend after the current consolidation runs its course.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Monetary policy will be in focus this week as the Federal Reserve and other major central banks announce their latest interest-rate decisions.
The Federal Reserve Open Market Committee concludes a two-day meeting on Wednesday afternoon with its interest rate decision and a press conference from chair Jerome Powell.
Market expectations are overwhelmingly that there will be no change in rates (see FEDWATCH INTEREST RATE PREDICTION TOOL below). More attention will probably be paid to the updated Summary of Economic Projections (the quarterly so-called “dot plot”) which includes the updated economic forecasts of each of the committee members.
Also this week, the Bank of England is expected to raise UK interest rates by a quarter of a percentage point and the Bank of Japan is deemed likely to keep its rate unchanged. The European Central Bank recently raised its target interest rate by a quarter of a point.
Earnings reports will include FedEx, AutoZone and Darden Restaurants.
This week's economic calendar will feature the latest data on the U.S. housing market. The Housing Market Index, Residential Construction Data and Existing Home Sales all come out this week.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - up 2.4% for the week.
Last week’s worst performing US sector: Technology (two biggest holdings: Apple, Microsoft) - down 2.8% for the week.
The proprietary Lowry's measure for US stock market Buying Power rose by 1 point last week to 140 and that of US stock market Selling Pressure fell by 5 points to 127 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 is below its 50-day moving average but above its 90-day and its long term trend line, with a RSI of 46***. SPY ended the week 7.2% 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 is below its 50-day and 90-day moving averages but fractionally above its long term trend line, with a RSI of 42***. IWM ended the week 24.3% 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 unchanged at 13.8. It is still below its 50-day and 90-day moving averages and below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
7.18%
(one week ago: 7.12%, one month ago: 6.96%, one year ago: 6.02%)
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP ..
Q3: +4.9%
(Previous quarters .. Q2: +2.1% provisional .. Q1: +2.0% final)
This data comes from the Atlanta Fed’s GDPNow model “now-cast”, which is a running algorithmic estimate of real seasonally-adjusted GDP growth for the current measured quarter based on multiple data points as they are released.
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: 34% (42% a week ago)
⬌ Neutral: 37% (28% a week ago)
↓Bearish: 29% (30% a week ago)
Net Bull-Bear spread: ↑Bullish by 5 (Bullish by 12 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 typically polled on Tuesdays and/or Wednesdays.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE PREDICTION TOOL ..
What will the Fed announce re: interest rate changes on September 20th after its next meeting?
⬌ No change .. 99% probability
(one week ago: 93%, one month ago: 90%)
↑ 0.25% increase .. 1% probability
(one week ago: 7%, one month ago: 10%)
Where will interest rates be at the end of 2023?
⬌ Unchanged from now .. 61% probability
(one week ago: 55%, one month ago: 31%)
↑ Higher than now .. 39% probability
(one week ago: 44%, one month ago: 3%)
Based on the Fed Funds rate (currently 5.375%)
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 (5.60%) being paid currently for the 4-month duration and the lowest rate (4.33%) 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 from 0.72% to 0.69%, 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 ..
“You might think you want an expensive car, a fancy watch and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it.” More Morgan Housel wisdom.
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).
The Big Three often refers to the three largest car manufacturers in North America: General Motors, Stellantis (formerly Chrysler), and Ford Motor Company.
After decades of dominating the U.S. and global markets, the Big Three have lost significant market share to automakers from Japan, South Korea, and Europe.
Competitors of the Big Three automakers include Toyota, Honda, and Nissan, companies that have attracted a loyal customer base for their reliable, fuel-efficient cars.
The Big Three have all invested heavily in the development of electric vehicles, hoping to gain back market share with their new lines of environmentally friendly cars.
The Big Three continue to maintain a large market share in the U.S., but globally, only Ford has been able to capture a market share comparable to other global brands.
The Big Three in the automotive industry is a reference to the three largest car manufacturers in the United States: General Motors Company (GM), Stellantis (STLA), formerly known as Fiat Chrysler, and Ford Motor Company (F). The Big Three are sometimes referred to as the "Detroit Three." All three companies have production facilities in the Detroit area, so their performance has a significant effect on the city's economy. Employees of the Big Three are represented by the United Auto Workers (UAW) union.
The companies' major competitors include international automakers such as Toyota Motor Corp, Honda Motor Company, Hyundai Kia Auto Group, and Nissan Motor Company.
For decades, the Big Three automakers dominated the U.S. and global markets; however, after the oil crisis of the 1970s and the subsequent run-up in gasoline prices, Japanese automakers began cutting into the Big Three's market share. Toyota, Honda, and Nissan attracted a loyal customer base seeking lower-priced, fuel-efficient cars. By the mid-1980s, the Japanese automakers continued their pressure on the Big Three, extending their brands into lines of luxury cars as well.
Since then, General Motors, Stellantis, and Ford have faced a wide array of other challenges, including poor management, labor disputes, and rising production costs. The profits (and losses) of the Big Three are thought to be an indicator of the state of the overall U.S. economy. During the financial crisis in 2009, Chrysler and GM both closed thousands of dealerships, filed for Chapter 11 bankruptcy and were bailed out by the U.S. Treasury through a loan under the Troubled Asset Relief Program (TARP).
In the first half of 2021, General Motors was the leading automaker by market share in the United States, capturing 16.48% of the car and light truck market. Coming in second was Toyota, with a market share of 15.01%. In third place was Ford, with an 11.92% market share, closely followed by Stellantis at 11.48% and Honda at 10.02%.
In terms of revenue, the leading automotive makers globally are Toyota and Volkswagen. However, when we take a look at the global market share, we get a much different picture of the Big Three.
In 2020, Toyota ranked at the top of the list, capturing 8.5% of the global automotive market share by brand. Volkswagen came in second with a 7.8% market share, followed by Hyundai at 5.4%, Ford at 5.1%, Honda at 4.8%, and Nissan at 4.2%. Clearly, the Big Three—which once dominated the global markets—have faced strong competition, losing their market share to automakers from Japan, South Korea, and Europe.
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