Markets basically just churned last week in advance of Friday’s release of the latest jobs data, with the S&P 500 closing on Thursday afternoon just a touch higher than it started the week on Monday morning.
Pelosi’s Taiwan visit and China’s entirely predictable reaction only briefly raised pulses but markets basically ignored it. Nothing to see here. Silly geopolitical stunts are not driving market sentiment, it’s still investors’ perceptions of future Federal Reserve (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) actions.
Federal Reserve regional presidents seem to be reverting to their playbook of having stock markets do their work for them by using soundbites to accomplish some serious expectation-setting. Here’s me playing right into their hands;
Minneapolis Fed president Neel Kashkari sounded very punchy:“We are a long way away from achieving an economy that is back at 2% inflation. And that’s where we need to get to.”
San Francisco Fed president Mary Daly told CNBC that the central bank was “nowhere near almost done” raising interest rates to combat inflation.
Chicago Fed president Charles Evans said that a third-straight 0.75% hike in September might be appropriate if there was no meaningful downturn in inflation by then.
Cleveland Fed president Loretta Mester: "We have more work to do .. it's got to be a sustained several months of evidence that inflation has first peaked - we haven't even seen that yet - and then that it's moving down”
St. Louis Fed president James Bullard said that the Fed Funds rate will have to end 2022 in a range of 3.75% to 4.00% – which implies another 1.50% more in rate hikes from here.
As I mentioned last week, the recent market rally is almost entirely under-pinned by the assumption that we have now reached peak inflation (and thereby we are closer to peak Fed interest rate hiking). This upcoming week, we will begin to find out if that assumption is justified with the release of the latest Consumer Price Index (CPI) measure of retail inflation and the Producer Price Index (PPI) measure of wholesale inflation.
But last week was all about Friday’s jobs report.
When it came out, the report was red-hot. Indeed, initial fears were that it was too hot. 528k new jobs were created in July, up from a revised gain of 398k in June, and more than double the expected 250k. The unemployment rate edged down from 3.6% to 3.5%, the lowest level in over half a century (recession? .. er, I don’t think so).
There were definite concerns that it showed that the Fed’s four interest-rate increases this year have so far done very little to dampen rampant labor demand. And buried deep within the report is the evidence of rapidly rising wages (average hourly earnings rose 0.5% last month alone) which can feed the beast of inflation, making it harder and more painful for the Fed to kill.
The more optimistic take, however, is that continued strength in hiring despite tightening monetary policy means the labor market will be able to withstand further rate hikes and buffer the economy against any downturn thereby protecting against a future recession. As a Harvard economist said on Friday: “Nice to see this many jobs added, but it is scary about what it means for the size of the adjustment we may have coming”.
In the end the markets just seemed dazed and confused all day on Friday, meandering around aimlessly to close mixed as attention now very much shifts to the massively impactful CPI and PPI numbers coming out this week.
“Not-as-bad-as-feared” data is no longer good enough to get stocks to bounce much further from the June lows. When the S&P 500 index (SPX) is at 4,140, it’s much harder to get a positive response from such fuzzy data than at SPX 3,670 which is where we were in mid-June.
Instead, we need actual, crystal-clear, positive data this week showing peaking inflation to avoid a stall in this rally, or maybe even a sharp reversion back towards the mid-June lows and possibly below if any kind of realization sets in that this whole July rally may just have been built on sand.
OTHER NEWS:
Things ain’t what they used to be .. Robinhood is slashing about 23% of its staff as the online brokerage continues to reel from a sharp slowdown in its customer trading activity. The job cuts mark the second round of layoffs this year at Robinhood, which in April got rid of about 9% of its full-time employees at the time. That’s over a thousand jobs eliminated in less than four months. The stock, which was at a high of 70.39 almost exactly a year ago, closed on Friday at 10.39 (I’ll save you the trouble of doing the calculation, that’s a fall of 85.2%).
Oil sliding .. The price of crude oil futures dropped below $90 per barrel last week, that’s lower than it was at the time Russia began its invasion of Ukraine. The latest drop comes after the Organization of the Petroleum Exporting Countries (OPEC) and its allies said they would increase oil production by 100k barrels a day beginning next month. Prices are also falling as a result of the possibility of a global recession and concerns about how that could impact demand for oil.
Gas prices at the pump have fallen for over 50 straight days to an average of around $5.00 per gallon. That said, it's still a lot higher than at this time last year when the average price was $3.19.
Jolly not good .. The Bank of England (BOE) implemented its biggest interest rate rise in 27 years last week and issued a dire warning that the United Kingdom is set to fall into a possibly years-long recession. The monetary policy committee increased the base interest rate by half a percent to 1.75%, its sixth consecutive raise and the biggest single increase in interest rates since 1995, in an effort to control runaway inflation.
Even with these measures, the CPI measure of UK retail inflation is now forecast by the BOE to go above 13% by year-end, the worst level since Queen first briefed us that another one had bitten the dust in 1980.
While this was all being announced, lame-duck Prime Minister Boris Johnson decided to head off on vacation to an undisclosed location and Nadhim Zahawi, the interim Chancellor of the Exchequer (Brit-speak for Finance Minister or Treasury Secretary) who has been in the job for all of about four weeks and probably won’t be by this time next month, was also “working remotely” from somewhere. But, never fear, both were said to be staying right on top of things on WhatsApp. You can’t make this shit up.
The country is typically a large component holding in any International Developed Market mutual fund or exchange traded fund (ETF).
UNDER THE HOOD:
Some technical analysts are starting to hone in on the S&P 500 (SPX) level of 4,231. If we break up through that level, that would mean that we will have retraced 50% of the index’s entire decline that began on January 4th. While in almost every bear market, there are often 20% retracements that ultimately fall apart and are subsequently followed by new lows, it is much more uncommon (though not unknown) for 50% retracements to fail in a similar fashion.
Having said that, it’s the job of every bear market rally to fool investors into believing that the bear market is over. This job gets harder and harder the lower the starting point of the upswing is and the rallies have to be made to look more and more convincing.
The comparative levels of Demand and Supply continue to move in the right direction with the measure of Demand stretching its advantage over that of supply. However, withdrawal of Supply appears to have been more responsible for this rather than a major expansion of Demand. This puts the onus on the buyers to step up if the current market advance is to develop into something more and they are not really showing a sign of that yet.
Another possible reason for skepticism in the current advance continues to be the lack of escalating volume that typically accompanies new bull markets. High volume is among the hallmarks of institutional accumulation. Last week, trading volume fell to its lowest level in over six months.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
A huge day coming up this week on Wednesday followed by a very big one on Thursday. Wednesday sees the release of the Consumer Price Index (CPI) measure of retail inflation for July. Expectations are for a 0.2% rise in the headline index and a 0.5% increase in the Core number. Then on Thursday, we get the release of the Producer Price Index (PPI) measure of wholesale inflation (raw materials for manufacturers) for July which is forecast to have risen 0.3% at the index level and 0.4% for the Core.
These are critical data releases as the recent market rally has essentially been based on an assumption that we are on the brink of seeing conclusive evidence that inflation has peaked. If such evidence is entirely absent, the stock market could have itself a big problem.
Second-quarter earnings season continues next week, including releases from Disney, AIG, Coinbase, BioNTech, Cardinal Health, Tyson Foods, Rivian, Fox Corp, Norwegian Cruise Lines, Illumina and Ralph Lauren.
The University of Michigan reports the August Consumer Sentiment Index this week, which has shown rapidly declining consumer optimism in recent months.
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US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 30% (up from 28% the previous week)
→Neutral: 31% (down from 32% the previous week)
↓Bearish: 39% (down from 40% the previous week)
Net Bull/Bear spread .. ↓Bearish by 9 (Bearish by 12 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: Technology (two biggest holdings: Apple, Microsoft) - up 1.9%
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 6.8%
- The NASDAQ-100 solidly outperformed the S&P 500
- US Markets again had a far better week than International Markets with Emerging Markets once again bringing up the rear
- Large Cap edged Mid and Small Cap
- Growth beat out Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 185 and rose by 11 points last week and that of US Market Selling Pressure is now at 156 and fell by 15 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 below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 64**. SPY ended the week 13.5% 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 66**. QQQ ended the week 20.4% 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 fractionally lower again for the fifth week in a row at 21.2 and remains below its 50-day and 90-day moving averages and its long term trend line.
ARTICLE OF THE WEEK:
This week .. Dr. Amazon will see you now .. A recent $3.9 billion purchase by Amazon could change the way healthcare is delivered (and priced!) in this country.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
The Federal Reserve System (FRS) is the central bank of the United States. Often simply called the Fed, it is arguably the most powerful financial institution in the world. It was founded to provide the country with a safe, flexible and stable monetary and financial system. The Fed has a board that is comprised of seven members. There are also 12 Federal Reserve banks with their own presidents that each represent a separate district (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco).
A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.
The Fed was established by the Federal Reserve Act, which was signed by President Woodrow Wilson on December 23rd 1913, in response to a financial panic in 1907. Before that, the U.S. was the only major financial power without a central bank. Its creation was precipitated by repeated financial panics that afflicted the U.S. economy over the previous century, leading to severe economic disruptions due to bank failures and business bankruptcies. The crisis in 1907 led to calls for an institution that would prevent frequent panics and disruptions.
The Fed has broad power to act to ensure financial stability, and it is the primary regulator of banks that are members of the Federal Reserve System. It acts as the lender of last resort to member institutions that have no other place from which to borrow. It has the mandate to ensure there is financial stability in the system. It is also the main regulator of the country's financial institutions.
The monetary policy goals of the Federal Reserve are twofold: to foster economic conditions that achieve stable prices and maximum sustainable employment.
The Fed's duties can be further categorized into four general areas:
Conducting national monetary policy by influencing monetary and credit conditions in the U.S. economy to ensure maximum employment, stable prices, and moderate long-term interest rates.
Supervising and regulating banking institutions to ensure the safety of the U.S. banking and financial system and to protect consumers' credit rights.
Maintaining financial system stability and containing systemic risk.
Providing financial services, including a pivotal role in operating the national payments system, depository institutions, the U.S. government, and foreign official institutions.
The Fed has an implicit target rate of inflation of 2%. The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
Inflation levels of 1% to 2% per year are generally considered acceptable, while inflation rates greater than 3% represent a dangerous zone that could cause the currency to become devalued. The Taylor rule is an econometric model that says the Federal Reserve should raise interest rates when inflation or gross domestic product (GDP) growth rates are higher than desired.
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