To the surprise of precisely nobody, the Federal Reserve resumed its campaign of interest rate increases on Wednesday, pushing its target Fed Funds rate up another quarter of a percentage point to a range of 5.25%-5.50%, the highest level since J-Lo joined forces with Ja Rule to point out to us that she was real back in 2001. It marked the eleventh increase since March 2022, at which time the rate was near zero.
There were only the slightest of tweaks to the wording of the committee's eagerly-awaited June policy statement and no hint that the Fed might react to the improved and improving inflation data of recent weeks by pausing its hikes. This left the door wide open to more interest rate increases, but the central bank fell short of saying that it was definitely going to walk through it. The market probability of a hike at the next meeting in September is now 20% (see FEDWATCH INTEREST RATE PREDICTION TOOL below).
In his press conference, Fed chair Jerome Powell, who stated that he didn’t believe inflation would return to the Fed’s 2% target (see ARTICLE OF THE WEEK below) until 2025, gave no guidance at all regarding the next meeting and no clue whatsoever as to what the Fed's parameters are for deciding to either hike further, suspend the rate hike campaign or eventually cut rates.
It felt like an infuriating exercise in saying nothing that left investors none-the-wiser about future Fed intentions. And we all know what happens when there is an information vacuum like this; the market will just fill it with its own thoughts and ideas.
Initially, investors seemed paralyzed with indecision by the lack of information. The S&P 500 Large Cap and Russell 2000 Small Cap indexes finished the day almost completely unchanged with the NASDAQ slightly lower.
Incidentally, readers may have noticed that, unlike most non-financial news outlets, I seldom reference the popular Dow Jones Industrial Average in this report. That’s because it’s a ridiculous, stupid index. So I won’t bother mentioning that it notched a 13th consecutive daily gain on Wednesday, a feat not achieved since 1987, before the streak finally came to an end on Thursday.
As the week continued, markets began to fill that information vacuum, deciding that they had learned absolutely nothing new and therefore we’re right back to where we were on Tuesday with the same expectations and risks and an unchanged timeline for a pause and eventual rate cuts that has helped drive stocks higher in 2023.
Thursday saw a stock market pullback, but as long as the “Three Pillars” of this rally remain in place: solid economic data (hope for a soft/no landing), disinflation and a near-term end to Fed rate hikes, these kind of retreats will probably be short-lived and pretty shallow and so it proved on Friday when stock prices resumed their upward march in earnest.
The European Central Bank (ECB) mimicked the Fed on Thursday, raising for the ninth straight meeting by a quarter point to 3.75% and itself leaving the door open to additional future hikes. ECB Chief Christine Lagarde was certainly more forthcoming than her Fed counterpart; “What I can assure you of is, we are not going to cut,” she said. “We want to break the back of inflation.” The Bank of Japan (BOJ) surprised markets with its own version of a rate hike on Friday, which is essentially loosening its rigid control of the country’s interest rate ceiling.
US economic data continued to spectacularly impress last week and it’s clear that we are currently a million miles away from a recession. The Personal Consumption Expenditures (PCE) Price Index, used by the Fed to measure inflation, confirmed the latest Consumer Price Index (CPI) data by falling to 3.0% annualized, down from 3.8% the previous month and the lowest since March 2021.
There was plenty more besides. Q2 Gross Domestic Product (GDP) obliterated expectations, increasing at an eye-popping annual rate of 2.4%, according to the official second estimate (of three). Durable goods far outpaced projections. Pending Home Sales jumped for the first time in four months. Weekly Jobless Claims moved lower. The quarterly Employment Cost Index, a broad measure of wages and benefits, increased 1.0% in Q2, its slowest advance since 2021. Consumer Confidence (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) rose to a two-year high.
Truckloads of Q2 earnings were released last week as well and despite some disappointments (Microsoft, Exxon-Mobil, Snap Inc, T-Mobile, eBay, Juniper, Chipotle, Bristol Myers), the broad narrative was net positive (Meta/Facebook, Alphabet/Google, Proctor & Gamble, Boeing, Verizon, Intel, GE, Comcast, Ford, 3M, Roku, Royal Caribbean). The expected 8% overall decline in US corporate earnings coming into this results season is looking more and more off-base by the day.
Markets have now embraced the idea that there will be no damaging economic slowdown just as aggressively as they believed at the start of the year that there would be an unavoidable nasty downturn. And, in the same way as those predictions proved to be too grim, the current view likely understates the risks over the coming quarters. The stock market is pricing in no more Fed rate hikes and interest rate cuts beginning in the first half of 2024. Disappointment on either count is where some of the biggest risks lie.
OTHER NEWS ..
What Can We Believe Any More? .. In its lawsuit against the crypto exchange and Binance founder Changpeng Zhao, the Securities and Exchange Commission (SEC) alleged last week that a firm he controlled massively inflated trading volumes on the exchange. Internal messages from Zhao appear to confirm this. Such “wash trading” accounted for more than 70% of trading volume on worldwide crypto exchanges, according to a study based on analysis of data from the second half of 2019. Zhao denies the charges. This obviously throws into even further doubt how much reliance can be placed on any data coming out of crypto-world and pushed into the public domain by its major participants.
That’s Not My Info! .. Two out of three credit complaints filed with the Consumer Financial Protection Bureau are because the consumer’s credit report contains information that belongs to someone else. The US consumer credit watchdog received 197,709 credit report complaints between September 2021 and August 2022. Of those complaints, 66% are because information in the report was not that of the subject of the report, but of someone else.
While misattributing information from one individual to another's account was the top complaint, improper use of credit reports was another common issue, as were concerns about unresolved investigations into existing issues, according to a report from Fair Credit, a law firm that specializes in correcting errors in credit reports.
Some Random Stats From Charlie Biello Of Creative Planning ..
The US population is now 19% higher than where it was in January 2000 while the inventory of Existing Homes for sale in the US is 37% lower
The number of car thefts in major US cities in the first six months of 2023 rose by over 104% over the same period in 2019. Kia and Hyundai thefts surged after a popular TikTok challenge using the hashtag #KiaBoys with more than 75 million views on the platform, provided viewers with handy tips on how to steal the cars.
Extra-virgin olive oil prices have increased 87% over the past year to a record high due to a severe shortage
Between surveys conducted from 2005 to 2006 and surveys conducted from 2017 to 2020, consumption of bottled water in the US rose 56% while the amount of regular cows’ milk consumed fell by almost 50%
UNDER THE HOOD ..
On the charts, the S&P 500 index SPX (which closed on Friday at 4582) is bumping up against a strong upside resistance level of 4585. Next stops are up at 4596 and 4610. Some downside support has developed at 4558 and particularly at 4529, then again further down at 4492.
It may appear that markets are in conflict right now with stocks apparently grinding their way into a new bull market while bonds continue to scream warnings of a looming recession. It should be noted that the tale of the tape is in favor of bond markets on the previous occasions that the two have gone head-to-head.
As I have pointed out before, it is more a withdrawal of Supply that appears primarily responsible for the recent stock market gains rather than the preferable healthy expansion of high-conviction Demand and this scenario is not typically indicative of the investor enthusiasm that usually accompanies lasting advances.
Having said that, there is no doubt that the body of evidence across the stock market is much improved. The parts that still need technical work are found in Small Caps and given the sheer number of stocks there, this is still the segment that requires the most monitoring.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
This week will be the busiest one of the Q2 earnings season, with a third of S&P 500 companies scheduled to report. The economic data highlights will be employment-related.
Apple, Amazon, Pfizer, CVS, Paypal, Starbucks, Qualcomm Caterpillar, Advanced Micro Devices, Alibaba, Uber, Simon Property, Shopify, Marriot, CBOE Markets and Dominion Energy are among the big boys on the docket this week.
The US Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday. The forecast is for a slight decline in job openings from the prior month.
Then on Friday it’s Jobs Day. Expectations are for a gain of 200k payrolls in July, following a rise of 209k in June. The unemployment rate is expected to remain at a historically low 3.6%.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Communication Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - up 4.8% for the week.
Last week’s worst performing US sector: Real Estate (two biggest holdings: Prologis, American Tower Corp) - down 2.8% for the week.
The proprietary Lowry's measure for US Market Buying Power is currently at 173 and rose by 11 points last week and that of US Market Selling Pressure is now at 111 and fell by 9 points 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 remains above its 50-day and 90-day moving averages and above its long term trend line, with a RSI of 69***. SPY ended the week 4.4% 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 remains above its 50-day and 90-day moving averages and above its long term trend line, with a RSI of 63***. IWM ended the week 19.0% 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 0.3 points lower at 13.3. It remains below its 50-day and 90-day moving averages and below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
6.81%
(one week ago: 6.78%, one month ago: 6.71%, one year ago: 5.30%)
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
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: 45% (51% a week ago)
⬌ Neutral: 31% (27% a week ago)
↓Bearish: 24% (22% a week ago)
Net Bull-Bear spread: ↑Bullish by 21 (Bullish by 29 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 usually polled on Tuesdays and/or Wednesdays.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE PREDICTION TOOL ..
What are the latest market expectations for what the Fed will announce re: interest rate changes (Fed Funds rate, currently 5.375%) on September 20th after its next meeting?
⬌ No change .. 80% probability
(one week ago: 84%, one month ago: 69%)
↑ 0.25% increase .. 20% probability
(one week ago: 16%, one month ago: 16%)
Where will interest rates (Fed Funds rate, currently 5.375%) be at the end of 2023?
↓ Lower than now .. 9% probability
(one week ago: 9%, one month ago: 24%)
⬌ Unchanged from now .. 62% probability
(one week ago: 64%, one month ago: 52%)
↑ Higher than now .. 29% probability
(one week ago: 27%, one month ago: 24%)
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 (5.58%) being paid currently for the 4-month duration and the lowest rate (4.01%) 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 to 0.90% from 0.98%, 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 ..
“There is no empirical evidence showing 2% is the optimal long-run inflation target”. Hey, Fed! What’s so damn special about 2%? asks Barry Ritholtz.
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).
CONSUMER CONFIDENCE INDEX (CCI)
The Consumer Confidence Index survey measures consumer attitudes and confidence regarding their financial prospects.
The index is issued by the Conference Board and is based on the Consumer Confidence Survey.
The CCI provides insight into U.S. economic conditions, including whether consumers might make major purchases, such as homes and automobiles.
The CCI measures and compares how consumers view the overall economy, business conditions, and labor market presently and over the next six months.
The CCI infers that when consumers are optimistic, they spend more, stimulating the economy, but when pessimistic, spending declines.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. The CCI is based on the premise that if consumers are optimistic, they will spend more and stimulate the economy but if they are pessimistic then their spending patterns could lead to an economic slowdown or recession.
The CCI is released on the last Tuesday of every month, and it is widely regarded as the most credible gauge of U.S. consumer confidence. Essentially, it is a barometer of the health of the U.S. economy and is based on consumers' perceptions of current business and employment conditions, and their expectations for the business, employment, and income for the next six months. CCI is conducted by Nielsen, a global provider of information and analytics on consumers' buying and watching habits.
The Consumer Confidence Index is based on the Consumer Confidence Survey, which has a responding sample size of 3,000 questionnaires. The survey was initially conducted every two months starting in 1967 but changed to monthly tracking in 1977.
There are five questions asked—two related to present economic conditions and three related to future expectations.
The Present Situation Index asks:
Respondents’ appraisal of current business conditions
Respondents’ appraisal of current employment conditions
The Expectations Index asks:
Respondents' expectations regarding business conditions six months hence
Respondents' expectations regarding employment conditions six months hence
Respondents' expectations regarding their total family income six months hence
Each response can be answered with one of three responses: positive, negative, or neutral.
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