U.S. markets found themselves heavily impacted last week by a number of decisions made from beyond its shores. The United States and China continue to trade jabs, particularly at each other’s tech giants and it’s having an effect on the stock market.
Apple stock (AAPL) is probably the largest holding in most investors’ total market and large cap fund portfolios and it fell hard, swiftly shedding over $200 billion in market value following Wednesday’s report that China now plans to expand its ban on the use of iPhones to government workers at state firms and agencies.
Apple currently earns over 19% of its revenues in China. The company’s woes (which also included a tongue-lashing last week from U.S. regulators about being overly restrictive in allowing access to payment apps) caused collateral damage to stock prices in some other parts of the tech sector last week before staging something of a recovery on Friday.
In the other direction, it was announced last week that the value of Chinese direct investments in the U.S. plunged to below $2.5 billion last year, less than half of 2021’s figure and the lowest since Beyonce first gave her shout-out to all the single ladies in 2009.
In Saudi Arabia, an extension of the country’s oil production cuts was announced and Russia confirmed export limits collectively totaling a drop of 1.3 million barrels/day worth of supply. That sent oil prices soaring to new highs for the year, directly impacting the U.S. economy (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). This adds further upside pressure on market interest rates, which continues to weigh on Small Cap stocks in particular as these companies are more reliant on debt financing to fund their operations than larger companies with greater cashflows.
President Biden was in India, entering talks with other world leaders (well, minus Vladimir Putin and Xi Jinping) at the G20 summit and, a month out from their annual meetings, the International Monetary Fund and World Bank were both subjected to a stern finger-wagging lecture from the U.S. Treasury about their “increasing mission creep” (notably their apparent recent shift to becoming climate change experts rather than financial and economic ones) distracting them from their core traditional roles of being laser-focused on global stability and growth.
While futures markets remain convinced that there will be no Fed rate hike this month (see FEDWATCH INTEREST RATE PREDICTION TOOL below), they are repricing the odds for one at the following meeting in November to slightly favor a quarter point increase then and are also beginning to push out the expected date of the first interest rate cut into the long grass of the second half of 2024.
The Labor Day-shortened week kicks off the stretch-run to year-end as well as the beginning of the traditionally rocky period that I mentioned in last week’s report. I want to clearly articulate the two biggest risks to the 2023 year-to-date rally that I believe we need to watch out for in the coming weeks.
Risk #1: Inflation Bounces Back. If inflation doesn’t just refuse to die but actually bounces back and the Fed has to keep raising rates, that will hit stocks and bonds hard as stock valuation will become more and more unattractive (this is what happened in August) and the chances of a hard landing will rise, with potentially disastrous results for stock prices, as this scenario has simply not been baked in to where valuations are right now.
Risk #2: Growth Slows Too Much. The U.S. economy is losing momentum - that much is clear and not, of itself, a bad thing for stocks in the short term. If growth data starts to implode however, then concerns will emerge the Fed has gone too far with its rate hikes. By that point, rate cuts won’t help materially because even if the Fed starts slashing rates, it’ll likely be too late by then to prevent a stock-killing growth slowdown.
The Three Pillars of the Rally that I always talk about (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) remain in place for now but if either (or both!) of these two risks above come to pass, that would materially damage the entire structure upon which the whole 2023 rally has been built and at that point the advance would be compromised with potentially serious consequences for stock prices.
I will be keeping a close eye on the data that could give clues about these risk factors, starting with the latest Consumer Price Index (CPI) of retail inflation and Producer Price Index (PPI) of wholesale inflation experienced by manufacturers, both out this week.
News was mixed last week. Stocks reacted nervously when the weekly jobless claims number came out at its lowest level for seven months, somewhat denting recent optimism that the labor market may be cooling down. On the other hand, for the third time this summer, Goldman Sachs lowered its odds of a U.S. recession arriving in the next 12 months to just 15%, down from 35% in March, with only a “shallow and short-lived economic slowdown” expected for this year.
Summarizing the current situation; the data is wavering a bit but still hinting at a soft landing and disinflation occurring, but not as convincingly as before. Expectations are still for an absolute maximum of one more Fed rate hike but the time at which we start to see some potential rate cuts is being pushed further and further out. Treasury yields (market interest rates) are near multi-decade highs.
This current situation reflects; 1) why we’ve seen a recent retreat in stock prices (rising Treasury yields) but also 2) how broader fundamentals are still supportive of stocks around these levels. As such this pullback is, at least for now, still more likely to be a consolidation in a still-upward-trending market than a fully-fledged course reversal.
OTHER NEWS ..
Turkey Doesn’t F**k About With Its Crypto Fraudsters .. Disgraced ex-crypto pin-up boy Sam Bankman-Fried is just weeks away from his splashy New York trial on charges of fraud and theft related to the collapse of his crypto exchange FTX which cost clients and investors billions of dollars. It could well see him sent to prison for a pretty solid stretch. There may be a little part of him, however, that is relieved he wasn't captured in Turkey where Faruk Fatih Ozer, who ran a local exchange called Thodex until it imploded in 2021 losing crypto investors there a reported $2.1 billion, was just convicted of fraud and sentenced last week to a prison sentence of 11,196 years.
Not Too Much Of An Impact .. Student loan debt repayments resume on October 1st after a three plus-year hiatus. Despite some hysterical articles that have appeared lately, the restart of student loan payments will likely not have any substantial impact on the overall economy, just as their suspension barely moved the needle in macro terms back in 2020 (it was the stimulus package and Fed actions that did). Not to downplay the effect that this can have on many individuals and maybe even a few specific sectors as borrowers recalibrate their discretionary income, the numbers just aren’t big enough in the context of a $20 trillion economy to be anything more than a slight drag.
Estimates for average monthly payments vary, but most sources put the average monthly student loan payment between $200-$400/month. If we take a true worst-case scenario and assume that all of the 40 million existing borrowers pay the the top end of that range at $400/month (which is not even close to accurate as so many borrowers are on reduced payment plans based on profession, income, length of the loan, etc.) then the “cost” to the U.S. economy over the next year would be about $192 billion (40 million x $4,800), not even 1% of its aggregate value.
Health Insurance Costs On The Up .. Costs for employer health coverage are expected to surge around 6.5% for 2024, potentially the biggest increase in more than a decade, according to an article in the Wall Street Journal. Hospitals’ higher labor costs and heavy demand for new and expensive drugs are among the factors behind the faster cost growth. Workers could well end up paying more out of their paychecks for coverage, although employers are generally expected to take on the lion’s share of the increase.
UNDER THE HOOD ..
The S&P 500 index SPX closed on Friday at 4457, down some for the week. The next upside resistance points are to be found at 4475, 4555 and 4586. Downside support levels are at 4420, 4370 and 4350.
There are several pieces of evidence suggesting a likely unresolved period of volatility over the coming days and weeks. The first relates to investor risk appetite. The behavior of Small Cap stocks is usually a clear indication of how committed to a trend investors really are. When Small Cap stocks can attract and maintain Demand, it implies that buying interest is broad-based, which usually secures and extends the life of uptrends. However, of late, Small Cap relative strength vs. that of its Big and Mid Cap cousins has completely crumbled, making smaller name, lower quality stocks a risky place to be right now.
Additionally, Lowry’s Buying Power measure (see LAST WEEK BY THE NUMBERS below) has been lethargic for a while now while Selling Pressure, which is close to shifting into the dominant position, has been relatively vibrant of late.
However, the bulk of Lowry’s most important intermediate-term and longer-term indicators remain just about intact in their general uptrends, but with potentially meaningful near-term uncertainty, both caution and patience are advisable.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
The latest inflation data will be this week's main event. A few company reports and investor days, an Apple iPhone-unveiling event and a European Central Bank interest-rate decision round out the other highlights.
Oracle and Adobe report this week. Moderna hosts an investor day on Tuesday. Apple is hosting a product event on Tuesday, where it is expected to announce its iPhone 15 and other hardware. The U.S. Department of Justice should finally bring its three-year-old antitrust case against Google to trial this week.
The Consumer Price Index (CPI) of retail inflation for August comes out on Wednesday morning. Consensus estimates are for a 3.6% year-over-year increase in the headline index and a 4.4% rise in the Core CPI, which excludes food and energy components. The next day the August Producer Price Index (PPI) of wholesale inflation experienced by manufacturers will be released.
The latest Retail Sales data for August will be out on Thursday and Consumer Sentiment Index on Friday.
The European Central Bank will announce a monetary-policy decision on Thursday. Futures pricing is anticipating no change in interest rates.
Finally, the current contract between the United Auto Workers (UAW) and the Big Three automakers expires at 11:59 P.M. on Thursday. The UAW have authorized a strike if no contract is agreed upon by the deadline.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) - up 1.4% for the week.
Last week’s worst performing US sector: Industrials (two biggest holdings: Caterpillar, Union Pacific) - down 2.9% for the week.
The proprietary Lowry's measure for US stock market Buying Power fell by 10 points last week to 139 and that of US stock market Selling Pressure rose by 4 points to 132 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 50***. SPY ended the week 6.7% 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 above its long term trend line, with a RSI of 40***. IWM ended the week 24.2% 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 0.7 points higher 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 ..
7.12%
(one week ago: 7.18%, one month ago: 6.96%, one year ago: 5.89%)
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP ..
Q3: +5.6%
(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: 42% (33% a week ago)
⬌ Neutral: 28% (32% a week ago)
↓Bearish: 30% (35% a week ago)
Net Bull-Bear spread: ↑Bullish by 12 (Bearish by 2 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 .. 93% probability
(one week ago: 94%, one month ago: 86%)
↑ 0.25% increase .. 7% probability
(one week ago: 6%, one month ago: 14%)
Where will interest rates be at the end of 2023?
↓ Lower than now .. 1% probability
(one week ago: 5%, one month ago: 9%)
⬌ Unchanged from now .. 55% probability
(one week ago: 62%, one month ago: 64%)
↑ Higher than now .. 44% probability
(one week ago: 33%, one month ago: 27%)
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 (4.26%) for the 10-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year rose from 0.69% to 0.72%, indicating a steepening in 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 ..
Do you dollar-cost-average in bear markets? I hope so.
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).
Over the past decade, the U.S. has begun producing more oil, decreasing reliance on imports.
As a result, new jobs have been created in the U.S., but oil exploration and extraction are expensive and highly capital-intensive.
That also means that oil prices impact the domestic oil sector more directly, with jobs and profits linked to the price of oil.
As consumers of oil, however, lower prices still benefit most consumers with cheaper gasoline and travel as well as lower prices of many manufactured goods.
In the 1990s and early 2000s, the United States was struggling under declining domestic oil production and the resulting need to import more oil. Wells in Texas and other regions were still producing, but falling far short of meeting growing energy demands. In the latter half of the 2000s, however, new technology allowed companies to economically draw oil and gas from shale deposits that were once considered depleted because the cost of extraction would be impractical.
Higher prices per barrel of oil also helped to justify the cost of a hydraulically fractured well (also known as fracking). The United States is once again one of the top producers of oil and gas. Greater domestic oil production is a net positive for the United States. However, as an oil-producing country (and not just an oil consumer), the United States now also feels an unpleasant pinch when oil prices drop.
The price of oil influences the costs of other production and manufacturing across the United States. For example, there is a direct correlation between the cost of gasoline or airplane fuel to the price of transporting goods and people. A drop in fuel prices means lower transport costs and cheaper airline tickets. As many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector.
Before the resurgence in U.S. oil production, drops in the price of oil were largely viewed as positive because they lowered the price of importing oil and reduced costs for the manufacturing and transport sectors. This reduction of costs could be passed on to the consumer. Greater discretionary income for consumer spending can further stimulate the economy. However, now that the United States has increased oil production, low oil prices can hurt U.S. oil companies and affect domestic oil industry workers.
Conversely, high oil prices add to the costs of doing business. And these costs are area also ultimately passed on to customers and businesses. Whether it is higher cab fares, more expensive airline tickets, the cost of apples shipped from California, or new furniture shipped from China, high oil prices can result in higher prices for seemingly unrelated products and services.
There are also environmental issues that accompany higher output via fracking, in both monetary, regulatory, and political costs, which need to be examined when looking at the impact of the industry on the U.S. economy today.
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