With Biden finally realizing last Sunday that he needed to walk the plank, the Democrats swiftly clearing the runway for Harris and the resulting shift in the election narrative, Wall Street’s prior assumption of a comfortable Trump victory in November was thrown into some doubt. It always had the potential to be a volatile week anyhow with a flood of Q2 earnings reports, including from some high profile names, as well as big GDP and inflation data releases and so it proved to be.
On Monday morning, the dip buyers at last returned from a one week vacation as the tech stocks that had been battered the week before were heavily bought up from their significantly lower prices (except for Crowdstrike obviously, which was savagely smashed lower again, about a quarter of the company’s entire value was erased in just two trading days). The generally positive euphoria intensified as the session wore on ahead of potentially consequential earnings reports and all of the indexes ended the day substantially higher.
There were some solid earnings before the opening bell on Tuesday from the likes of Spotify, GE, General Motors and Coca-Cola, although UPS (sometimes regarded as a bellweather proxy for the U.S. economy) badly disappointed and the stock price got butchered. The headline indexes meandered in and out of positive and negative territory all day, finishing a touch lower. The rotation trade that I talked about in last week’s report seemed to be back on as Small Cap stocks resumed their significant outperformance once again.
After the closing bell, Alphabet/Google’s results lacked a wow factor, with concerning levels of spending burn, although profitability slightly surpassed most estimates. Tesla, however, totally whiffed on earnings expectations yet again for the fourth straight quarter and also provided distinctly underwhelming forward guidance, despite Musk’s awkward and evasive attempt at smoke-and-mirrors on the analyst call. Both stocks ended up getting punished in after-hours trading and then again when real markets opened the next day.
A palpable change in tone emerged on Wednesday morning after Bill Dudley, former New York Fed president, publicly suggested that an interest rate cut should be made at this week’s Fed meeting rather than waiting until September. This sentiment was quickly echoed by a number of other analysts who suggested that, at the rapid rate that the economy appears to be cooling, a September rate cut might possibly be too late to save it from falling into recession.
Wall Street was spooked partly by this recession talk revival, but mostly by the Google and Tesla earnings and a growing concern that recent massive AI investment is actually not going to translate into materially higher productivity or revenue any time soon.
Stock indexes were pounded across the board from the moment that markets opened. The worst of the ugliness was saved for Mega Cap Tech and the NASDAQ in particular got slammed by waves of furious selling to experience its worst session since the dark days of October 2022. The carnage cascaded through Asian and European markets, pushing Japanese stocks into a technical correction (down >10% from the recent high). It also crashed other risk assets like crypto and commodities.
But then, before the New York opening bell on Thursday, we got the first estimate of Q2 Gross Domestic Product (GDP) which showed that the U.S. economy is in tremendous shape with a surging +2.8% annualized growth rate, blowing through the +1.9% expectation and +1.4% rate in Q1. This derailed fears of an upcoming recession and appeared to give the Fed breathing space until September for its destined rate cut.
The earnings reports kept on coming, including a profitability and outlook horror-show from Ford whose stock price was mercilessly punished as a result, all of its 2024 gains were wiped out in a matter of minutes. The indexes initially stabilized on the back of the GDP print and then bounced around rather chaotically for the rest of the session, to finish little changed but with Mega Cap Tech and AI still feeling very fragile.
Stocks turned higher and finished what was a tough week with some nice gains on Friday, with the Large → Small rotation trade very much back in play as the latest inflation reading did nothing to alter bets that interest rate cuts are definitely coming in September (see FEDWATCH INTEREST RATE TOOL below). Fed actions rely heavily on the Personal Consumption Expenditures (PCE) price index which showed core inflation (ex-food and energy) rose +0.2% last month and +2.6% annualized, all just as expected and further evidence of a continued declining trajectory towards the Fed’s 2.0% target.
While many of the more dramatic analysts out there are explaining this current pullback as a warning on future economic growth or extrapolating some kind of political commentary by the markets, my view is that it is being caused by much less sexy (yet still important) factors: institutional trader positioning and earnings. The recent meaningful decline in stocks is being driven by the correction of an overextended tech sector (particularly AI-related) and some disappointing earnings from a few specific corporations.
There is no evidence that the defensive sectors of the market are starting to notably and consistently outperform the broader market and until that happens, any weakness in stocks should not be viewed as a lasting top being established - but instead as a relief of over-heated short-term conditions and profit-taking pullback by major market players.
Of course, the persistent recession fear-mongers and Chicken Littles will eventually be right one day simply by virtue of the broken clock theory. For them, fear springs eternal, you might say.
OTHER NEWS ..
Trump Is Fluttering His Eyelids At The Crypto Bros. Regulators Are Worried .. On Saturday, Trump’s sudden enthusiastic embrace of crypto (and its potential donor dollars) resulted in a rousing speech at some Bitcoin convention in Nashville which was heaving with whooping, fist-pumping crypto bros, where he boasted that, if elected, he would immediately fire the Securities and Exchange Commission (SEC) chairman Gary Gensler and replace him with some pro-crypto individual who would push the agenda of the crypto industry in the U.S.
This, along with a weird Republican plan to force the U.S. government to buy and long-term hold billions of dollars-worth of Bitcoin for at least twenty years which could only ever be used to pay down national debt, is causing alarm among investor protection regulators and in the more sane corners of Wall Street. This follows Trump’s recent threat to put to an end the independence of the Federal Reserve and place interest rate decision-making partially under the individual control of the President.
Next Up, Ethereum .. The supposedly vehemently anti-crypto SEC approved the immediate listing of multiple spot Ethereum exchange traded funds (ETFs) on Monday, less than a year after approving a whole suite of Bitcoin ETFs. Investors can now safely and easily hold Ethereum in a regulated and secure ETF wrapper on a proper stock exchange in a normal brokerage account or IRA instead of inside some dodgy wallet or on one of the expensive and potentially unsafe crypto exchanges.
The ETFs based on the spot price of the second largest cryptocurrency with a $420 million market capitalization, started trading the next day.
Light At The End Of The Tunnel? ..The housing market again showed a slowdown in sales but a rise in prices in June. The median existing home sale price in the U.S is now $426,900, up 4.1% from last year and the second record high in a row.
Sales of existing homes dropped 5.4% from last month and the same amount from a year ago. However, in a sliver of hope for buyers, inventory in June rose to a 4.1-month supply, a 3.1% improvement over May and a sign that purchasers may finally gaining a bit more leverage in the market.
Champagne And Coffee .. Demand for champagne is softening this year after the boom that followed COVID lockdown. There had been a general sense of “revenge pleasure” in 2021 and 2022 after consumers were stuck at home by lockdowns and sales ballooned. That’s fading now, although there’s been no significant fall in demand for high-end champagne in nightclubs or top restaurants around the world. It’s home consumption that has apparently collapsed.
Any consumers who may have replaced champagne with coffee are now facing price rises in their new tipple of choice. Both the high-end arabica beans favored by coffee chains like Starbucks and the more budget-friendly robusta variety have spiked in price, thanks to bad weather and major supply disruptions from Vietnam to Brazil. Up and down the supply chain, sellers have been raising prices and scrapping discounts to protect their margins and many warn of more increases ahead.
ARTICLE OF THE WEEK ..
Three investment myths you’ve probably heard - and why they are all wrong.
THIS WEEK’S UPCOMING CALENDAR ..
This is going to be another very busy week. More than 160 S&P 500 companies (including a good number of the big dogs) are scheduled to report Q2 results, the Federal Reserve will announce an interest-rate decision on Wednesday and, as if that wasn’t enough, we get JOLTS on Tuesday and the Jobs Report on Friday.
Earnings highlights will include Microsoft, Apple, Amazon, Meta/Facebook, Exxon-Mobil, Pfizer, Moderna, Boeing, McDonalds, Mastercard, Intel, Chevron, AMD, Procter & Gamble, Merck, Starbucks, PayPal, Qualcomm, Biogen, American Tower, Conoco, Etsy, eBay and Marriot.
On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) will be released ahead of the main event, Friday’s Jobs Report. Consensus estimates call for a +177k gain in payrolls for July, after +206k in June.
The Federal Reserve's policy making committee is widely expected to keep interest rates unchanged on Wednesday. The focus will be on the post-meeting press conference from chairman Jerome Powell. Everyone will be listening for any confirmatory hints about the fully-anticipated September rate cut.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - up 1.7% for the week.
Last week’s worst performing U.S. sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - down 2.8% 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 fell 0.9% last week, is up 14.5% so far this year and ended the week 3.6% below its all-time record closing high (07/16/2024).
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 3.6% last week, is up 11.7% so far this year and ended the week 7.6% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.78%
One week ago: 6.77%, one month ago: 6.86%, 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 next meeting on July 31st?
Yes .. 5% probability (5% a week ago)
No .. 95% probability (95% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on September 18th?
Yes .. 100% probability (97% a week ago)
No .. 0% probability (3% 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: 4.625% (implying three 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.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE:
70% (348 of the S&P 500 stocks ended last week above their 50D MA and 152 were below)
One week ago: 64%, one month ago: 46%, one year ago: 86%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
75% (377 of the S&P 500 stocks ended last week above their 200D MA and 123 were below)
One week ago: 73%, one month ago: 67%, one year ago: 74%
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: 43% (53% a week ago)
⬌ Neutral: 25% (24% a week ago)
↓Bearish: 32% (23% a week ago)
Net Bull-Bear spread: ↑Bullish by 11 (Bullish by 30 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 ..
3.08%
One week ago: 3.09%, one month ago: 3.18%, one year ago: 3.91%
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 (5.51%) is being paid for the 2-month duration and the lowest rate (4.06%) 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 0.24% to 0.16%, 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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