While the FBI searching Trump’s home at Mar-a-Lago and its aftermath might have been the biggest deal in the civilian media last week, it was a complete non-event as far as the financial markets were concerned. There was only ever going to be one story last week. Well, maybe one and a half.
Data released on Wednesday showed that the Consumer Price Index (CPI) measure of retail inflation was unchanged in July after a 1.3% rise in June, as gasoline prices fell sharply, offsetting continued increases in food and shelter costs. The year-on-year increase was 8.5%, down from 9.1% in June. The Core number, which excludes volatile food and energy prices, also showed signs of softening - edging up just 0.3% in July and now up 5.9% from a year ago. All these came in lower than expected.
The following day we learned that the less impactful but still important Producer Price Index (PPI) measure of wholesale inflation of manufacturing raw materials actually fell 0.5% in July after a 1.0% gain in June, and was up “only” 9.8% from a year ago, down sharply from the year-on-year rate of 11.3% the previous month and well below analyst expectations.
While both of these releases reinforced the idea of peak inflation, Fed-speak from various regional Fed presidents which generally described the data as a “welcome sign” that“could lead to a slowing” in the pace of rate hikes (for example, half a percent in September, not three-quarters) also pointed to the possibility of peak Fed hawkishness maybe having been reached.
As regular readers will remember me saying, a perception that we have reached peak inflation and peak Fed hawkishness are two of the major requirements for a sustainable market recovery.
So the investor battle lines are drawn ..
On one side are the bulls. In their perfect world:
there would be an accelerated decline in inflation,
a very moderate slowing of growth,
the Fed opening the door to a pause in interest rate hikes in 2022 and regional Presidents backing off hawkish statements
China either has a much-reduced level of COVID cases or backs away from its Zero-COVID policy,
some kind of de-escalation, a pause or a cease-fire in the Ukrainian conflict.
This ultra-cheerful scenario could generate a very significant further jump in stock prices across the board, possibly in the indiscriminate and chaotic manner that technical analysts have been waiting for to complete that final transition from overall bearish back to bullish conditions.
The S&P 500 has already recovered more than half of its January 4th to June 16th decline in less than two months.
Futures market positioning now strongly favors the probability of “only” a half a percent interest rate rise at the next Fed meeting in September instead of the previously-favored three-quarters of a percent and there are even a few Optimist Ultras who think it could be less than that.
Since bottoming at 10,646 on June 16th, the NASDAQ composite index has rallied 22.5% to close last week at 13,047, technically entering a new bull market (up over 20% from a recent low). While the new bull market designation is largely symbolic, it does bring to an end the longest bear market for the index since the dark days of 2008.
Lined up against the bulls are the bears who warn of a scenario where:
inflation just flatlines or dribbles slightly lower rather than substantially declines,
growth falls at a faster rate than inflation creating stagflation (see my weekly review entitled “Fear The Stag” from way back in October last year). At SPX 4,280, stagflation is most definitely not priced into stocks in any way,
the Fed doubles down on its commitment to keep raising interest rates as much and as frequently as it needs to in order to defeat inflation and regional presidents are not afraid to publicly talk up this strategy,
China continues to have to impose lockdowns over scattered outbreaks and a still-robust Zero-COVID policy,
there is no sign of de-escalation, a pause or a cease-fire in the Ukrainian conflict.
This much more gloomy scenario could potentially unmask the recent rally as simply a house of cards and in need of correction back down to mid-June lows or even below to reinvigorate any kind of justified sustainable Demand.
They argue that, by virtue of shorter term interest rates being higher than longer term ones (the infamous “inverted yield curve”) the bond market is screaming that we are headed for an economic contraction that hasn’t even had a chance to start yet. The economy has not yet begun to really feel the impact of higher interest rates, they say, since these take time to filter through. Normally, the economy has years to absorb 3% of interest rate increases. By September, the Fed will likely have hiked 3 full percentage points in the space of six months.
As for the new NASDAQ bull market, they argue that explosive rallies of 20%+ are actually more common in bear markets than in bull markets. From 2000 to 2002, for example, the NASDAQ had multiple upswings of more than 20% that were each followed by steep declines and renewed lows within months. It wasn’t until October 2002 that the index finally entered a bull market that lasted for a few years.
A similar pattern was seen during the 2008-09 financial crisis. The NASDAQ gained 25% from November 2008 to January 2009, but then fell 23% from January to March that year before it hit its lowest point of the crisis on March 9th 2009.
But first blood went to the bulls, traders were impressed with the inflation data and started pushing prices meaningfully higher, spurred on by the approving nods from the Fed regional presidents and a general lack of fresh worrying news out of China.
The bull case is getting more traction at the moment, although that can certainly change. It unquestionably doesn’t hurt that it is the preferred scenario that investors emotionally want to happen. Financial markets are often depicted as being like cyborgs driven by streams of purely quantitative data running roughshod over investor hopes and dreams. But sometimes such emotional “tilts” can put a thumb on the scale and be the bulls’ secret weapon.
OTHER NEWS:
Biden-bound .. The Senate passed the Inflation Reduction Act of 2022 (see this week’s EXPLAINER: FINANCIAL TERM OF THE WEEK below), a climate and tax package which would raise more than $700 billion in government revenue partly driven by a 15% minimum tax on large corporations. It passed through the House on Friday and is now heading to Biden’s desk for the president’s signature. Broadly speaking, it’s deemed to probably be net slightly positive for the green energy space and net slightly negative for pharma, but generally markets don’t expect its passage to have much meaningful impact on stock prices in the near term.
Not so fast .. Over 38% of U.S. adults say they are now reconsidering major milestones such as buying a house or a car because of inflation. More than half of respondents to the survey from TheBalance.com said that, while they had been considering buying a car, getting married, purchasing a home, having a child and/or other major milestones in the next twelve months, inflation has forced them to reconsider those choices.
Buying a car topped the list as the #1 milestone to be delayed. The next most common major purchase to be delayed was a home purchase. Of those who were originally thinking of buying a house in the next year, 78% are now planning to delay the purchase or are reconsidering the idea altogether. Among those who were considering changing careers in the next year, 72% are now planning to delay taking such action or are completely reconsidering doing it at all.
Slapping it on the plastic .. In a sign of the continuing toll from decades-high inflation, Americans loaded an extra $46 billion on their credit cards during Q2 2022 and their balances saw the sharpest increase in more than 20 years. Credit card debt grew 5.5% from Q1 to Q2 and 13% year-on-year.
Overall, Americans added $312 billion in mortgage and non-mortgage debt during Q2, an increase that New York Fed researchers called “pretty sizable”. In fact, it’s the largest nominal increase since The Bieb advised you to love yourself in 2016. Data also showed rising delinquency levels in credit card, car loan and other forms of debt.
UNDER THE HOOD:
Heading into the CPI number, fading short-term Demand and plummeting volume, along with highly overbought conditions and formidable potential technical resistance approaching made for shaky short term conditions. As has been mentioned in the last couple of my reports, it is the withdrawal of Supply that has been the primary technical driver of the rally rather than an expansion in Demand and that starts to become a problem after a while.
Healthy, sustainable advances are almost always accompanied by roughly symmetrical heavy expansions in Buying Power (Demand) and contractions in Selling Pressure (Supply) in a high volume market and that is just not what is happening right now. It’s mostly about simply a drop in Supply in a very low volume market (now at its lowest level in eight months).
The spotlight going into Wednesday’s inflation release was very much on the buyers, who have so far been rather careful and measured, to step up big time and start going a little crazy and for volume to expand sharply. And they probably need to do this soon, before this whole rally risks fizzling out or even meaningfully reversing as a result of their relative inactivity.
Of course, the lows of June 16th on poor Demand and low volume could still yet prove to be the bear market bottom, but it would be as a result of seller apathy rather than buyer enthusiasm. While not unprecedented, that is a far more unusual and insecure foundation for a valid market turnaround.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR .
This week will see some particularly interesting earnings reports as many retailers will announce which could give some insight into the state of the US consumer. The big names reporting next week include Walmart, Home Depot, Lowe’s, Target, TJ Maxx, Bath & Body Works, Ross Stores, Estee Lauder, John Deere, Cisco, Applied Materials and Agilent Technologies.
Further insight into consumer behavior can be gleaned from next week’s release of retail sales figures which is expected to keep growing, albeit at a slower pace.
Lots of housing data this week. The National Association of Home Builders releases its housing market index for August. The consensus estimate is for a 53 reading, compared to July’s 55. The Census Bureau reports new residential data for July. Forecasts call for a seasonally adjusted annual rate of 1.53 million new housing starts, about 30,000 fewer than in June. Then the National Association of Realtors reports existing home sales for July. Expectations are for a seasonally adjusted annual rate of 4.85 million homes sold.
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US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 32% (up from 30% the previous week)
→Neutral: 31% (unchanged from 31% the previous week)
↓Bearish: 37% (down from 39% the previous week)
Net Bull/Bear spread .. ↓Bearish by 5 (Bearish by 9 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Sentiment survey participants are usually polled on Tuesdays and Wednesdays
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - up 7.6%
- Last week’s worst performing US sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Coca-Cola) - up 1.3%
- The S&P 500 outperformed the NASDAQ-100
- US Markets and International Developed Markets performed equally and both finished ahead of Emerging Markets
- Mid Cap stocks beat out Large and Small Cap
- Value stocks did slightly better than Growth
- The proprietary Lowry's measure for US Market Buying Power is currently at 198 and rose by 13 points last week and that of US Market Selling Pressure is now at 139 and fell by 17 points over the course of the week
- SPY, the S&P 500 ETF, is above both its 50-day and 90-day moving averages but still just below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 72**. SPY ended the week 10.6% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF is above both its 50-day and 90-day moving averages but still below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 67**. QQQ ended the week 18.2% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended lower again for the sixth week in a row at 19.5 and remains well below its 50-day and 90-day moving averages and its long term trend line.
ARTICLE OF THE WEEK:
This week .. What you need to consider as you try to financially navigate each decade of your life.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
INFLATION REDUCTION ACT OF 2022
The Inflation Reduction Act of 2022, H.R. 5376, is designed to reduce the deficit and lower inflation while investing in domestic energy production and lowering healthcare drug costs. It passed the Senate on August 7th 2022 and the House of Representatives on August 12th and is now set to be signed into law by President Biden. In essence, the legislation is a scaled-down version of the Build Back Better Act proposed by the Biden administration in 2021.
According to Senate Democrats, the proposed legislation would raise $725 billion, require total investments of $433 billion, and result in a deficit reduction of more than $292 billion. The bill allows Medicare to negotiate lower prescription drug prices and extends the expanded Affordable Care Act program for three years, through 2025.
Additionally, the agreement establishes policies designed to promote and support domestic energy and transmission projects. The goal: to lower costs for consumers and help the U.S. meet long-term emissions goals.
According to the White House, the Inflation Reduction Act would make "the single largest investment in climate and energy in American history."2 Spending is designed to lower energy costs, increase cleaner energy production, and reduce carbon emissions by 40% by 2030.1
The bill accomplishes a longstanding Democratic goal to allow Medicare to negotiate lower drug prices, although there are limits to both the number of drugs affected and the time frame involved. Another plus is a $2,000 annual cap on out-of-pocket drug costs. ACA healthcare premiums will be lowered for millions of Americans under the legislation for three years once the bill becomes law.
A significant funding source for programs in the legislation will be a 15% corporate minimum tax on companies making more than a billion dollars per year. Meantime, the bill imposes no new taxes on families that make $400,000 or less or on certain small businesses.
Each component of the 755-page bill falls under one of two areas listed in the table: revenue or investments. Since the legislation raises more revenue than the amount spent, the difference between the two is available for deficit reduction.
[Click here and scroll down to see all the specific provisions of the Inflation Reduction Act of 2022]
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