We Need Goldilocks.
06/05/2022. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.
Stocks looked on track to rise for the second straight week after that seven-week barren spell. The indexes were marching higher, having overcome headwinds like some alarming inflation numbers from the EuroZone, rising oil prices caused by enhanced European sanctions on Russia and some rather unimpressive earnings guidance from Microsoft. Then came Jobs Friday.
The Labor Department announced that U.S. employers added more jobs than expected last month, but fewer than in April. 390k jobs were added in May, above economists’ estimates of 317k, after an upwardly-revised gain of 436k for April. Much of the gains were in the services sector, as jobs rose in leisure and hospitality, professional and business services. The unemployment rate remained at 3.6%, with the number of unemployed essentially unchanged at six million. This all sounds pretty good, right? Keep on buying stocks, yeah?
Not so fast, said investors. None of these data seem likely to induce the Fed to slow its pace of interest rate increases. You may have seen in the media recently that these days “good” economic data is “bad” for markets and “bad” economic data is “good” for markets. It’s not quite as simplistic as that - but there is definitely a requirement for major economic data to be of what’s known as the “Goldilocks” variety, not too hot and not too cold.
That is, economic readings that still imply some growth, but that also reflect that an economy is losing forward momentum showing that Fed tightening is working. This is the needle the Fed is trying to thread. And that’s especially true of Friday’s jobs report. The sense was that it was not quite Goldilocks enough and prices turned and headed south for the rest of the day on Friday to finish lower for the week.
I have previously identified the three main drivers of stock markets right now which need at least movement towards resolution before we can experience a meaningful and sustainable recovery and it’s worth checking in on where they currently stand.
Inflation and its effect on the Fed .. It’s still unclear by how much inflation will decline but there are some signs that we may have seen the peak. These include the last set of both Consumer Price Index (CPI) and Producer Price Index (PPI) data as well as the measure most closely watched by the Fed when making its decisions, the Personal Consumption Expenditures (PCE) Index (see FINANCIAL TERM OF THE WEEK below). We will learn more on Friday when the CPI data for May is released. The knock-on effect of this data is, of course, the response of the Fed when it comes to how aggressive it needs to be with interest rates to combat inflation.
China lockdowns .. Heavy lockdowns in Beijing still have not materialized. Shanghai is continuing to open up and factory production is recovering but caution will remain not just until it reaches pre-lockdown levels but until the risk of further shutdowns in the future is eased. Though it will never be officially acknowledged by the authorities, there is a sense that the Chinese government appears to be backing off the idea of “Zero-COVID” and its resulting economic carnage. Important to remember, however: there is a link between expanding Chinese industrial activity and a rising oil price, so it’s not necessarily all “good news” for Western economies as this factor moves towards its eventual resolution.
Geopolitical .. The stalemate in the Ukraine continues with no material progress towards a ceasefire, we are now beyond a hundred days since the Russians moved in. Commodity prices (particularly oil and wheat) will maintain a pretty hard floor while the conflict is ongoing which will continue to impact inflation, as well as the supply chain crunch which is still very much a problem.
These are the issues to keep an eye on in the coming weeks. While I am not saying that stock markets will directly track positive or negative developments, the fact is that rallies, bounce-backs and apparent recoveries can probably not be fully trusted until there is more tangible turnaround in most, if not all, of them.
All that commotion for this? .. The S&P 500 moved at least 2% on eight of the 21 trading days in May. It bottomed out hard on May 19th. Things felt very volatile, there were some crazy days of movement in both directions. Yet the index ended May at 4,132, just a single point higher than than the 4,131 close on the last trading day of April. As Barrons put it last week, it's a violently flat market out there.
Scary banker talk .. JPMorgan Chase CEO Jamie Dimon said the bank is preparing for an “economic hurricane,” and warned investors that they needed to “brace” for it. Dimon told a financial conference the economy is facing a range of challenges, including Federal Reserve moves to combat inflation and the impacts from the war in Ukraine, as well as the fact that consumers are running out of their stimulus-driven savings cushion, spelling trouble for the economy in the not-too-distant future.
Wells Fargo CEO Charlie Scharf also raised concerns about the Fed’s inflation-fighting plans, arguing at a separate event that it will be extremely difficult for policymakers to provide a soft landing for the economy. He said that “it’s going to be hard to avoid some sort of recession”.
Goldman Sachs President and COO John Waldron warned that we are living through “the most complex and dynamic environment” he had ever seen, with “unprecedented factors” hurting the economy.
Meanwhile, at the other end of the spectrum of understanding anything whatsoever about financial markets, Elon Musk said he has a “super bad feeling” about the economy. Cheers, Elon. Eloquent and insightful as always.
Housing about to cool off? .. Houses listed for sale increased last month for the first time in almost three years, suggesting the tightness in the U.S. real estate market might be easing. The inventory of homes actively for sale on a typical day in May rose 8% from a year ago, a gain of 38k homes. The last time listings increased month-to-month was when Lil Nas X and Billy Ray Cyrus were seen heading down Old Town Road in June 2019.
The amount of newly-listed homes rose by 6.3%, also the most since 2019. The total number of unsold homes, those either previously listed or in various stages of the selling process, fell 3.9% year-over-year, but that was a lot less of a decline than the 10.9% year-on-year fall recorded in April.
However, sellers continue to demand top dollar, with the median listing price for active listings at an all-time high of $447k. That’s a jump of more than 17% from last year and over 35% from May 2020.
Under The Hood:
The sizable drop in Selling Pressure early in the week to a recent new low is a promising element of potential trend change. However, it is important to remember that Selling Pressure had just reached its latest in a series of new highs as recently as May 12.
We are still awaiting full capitulation to signal a possible bottom, with heavy and completely indiscriminate selling combined with a noticeable and sustained spike in trading volume and the VIX measure of market risk and volatility likely rising to the 40 level (I now track this on a weekly basis in this report and you can see below that it ended last week below 25).
Desperately focusing on trying to catch the exact market bottom is a stupid and futile exercise. Remember that it is always preferable and more profitable to be later to a new bull trend, with greater conviction and more evidence, than early with less of both.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
The upcoming week’s calendar ..
While there are no major companies reporting earnings this week, Pfizer is holding an investor meeting and Advanced Micro Devices (AMD) hosts a financial analyst day.
The big economic-data highlight next week will be the critical latest U.S. inflation reading, coming out on Friday. The Consumer Price Index (CPI) is expected to have climbed 0.7% in May, for a 8.2% year-over-year increase. Excluding food and energy components, the core CPI is seen rising 0.4% last month and 6% from a year earlier. Meaningful deviation from these expectations in either direction could cause considerable volatility one way or another.
Other data out next week will include the Consumer Sentiment Index for June and the European Central Bank’s possibly impactful monetary-policy decision.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 32% (up from 20% the previous week)
→Neutral: 31% (up from 27% the previous week)
↓Bearish: 37% (down from 53% the previous week)
Net Bull/Bear spread .. ↓Bearish by 5 (Bearish by 33 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Bull-Bear spread: Bullish by 8
Source: American Association of Individual Investors (AAII). All numbers rounded.
LAST WEEK BY THE NUMBERS:
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) - up 1.1%
- Last week’s worst performing US sector: Healthcare (two biggest holdings: Johnson & Johnson, UnitedHealth Group) for the second week in a row - down 3.2%
- The NASDAQ-100 slightly outperformed the S&P 500
- The US Market was outperformed by all overseas markets, particularly Emerging Markets
- Small Cap fell by less than Mid or Large
- Growth somewhat outperformed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 186 and fell by 6 points last week while that of US Market Selling Pressure ended Friday at 180 and rose by 2 points over the course of the week
- SPY, the S&P 500 ETF is still below both its 50-day moving average and its 90-day and also remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 50**. SPY ended the week 14.0% below its all-time high (01/03/2022)
- QQQ, the NASDAQ-100 ETF, is still below both its 50-day moving average and its 90-day and also remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 49**. QQQ ended the week 24.2% below its all-time high (11/19/2021)
** RSI readings range from 0-100. Readings below 30 indicate an over-sold condition, possibly primed for a technical short term rebound and above 70 are considered over-bought, possibly primed for a technical short term decline.
- VIX, the 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 the week at 24.8 and is below its 50-day and 90-day moving averages although it is above its long term trend line.
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across recently.
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
The term personal consumption expenditures (PCEs) refers to a measure of imputed household expenditures defined for a period of time. Personal income, PCEs, and the PCE Price Index reading are released monthly in the Bureau of Economic Analysis (BEA) Personal Income and Outlays report. Personal consumption expenditures support the reporting of the PCE Price Index, which measures price changes in consumer goods and services exchanged in the U.S. economy.
In 2012, the PCE Price Index became the primary inflation index used by the U.S. Federal Reserve when making monetary policy decisions. It is comparable to the Consumer Price Index (CPI), which also focuses on consumer prices. Other measures of inflation also tracked by economists can include the Producer Price Index (PPI) and the Gross Domestic Product (GDP) Price Index.
Personal consumption expenditures are among the three main parts of the Personal Income and Outlays report. Personal income shows how much money consumers earn. Personal consumption expenditures are a measure of the outlays or how much consumers spend.
The PCE Price Index uses the personal consumption expenditures component of the Personal Income and Outlays report to derive the PCE Price Index, which is the third major component of Personal Income and Outlays showing how prices are periodically inflating or deflating.
Personal consumption expenditures are shown by the BEA in current dollars and chained dollars since 2012. Personal consumption expenditures form the basis for the reporting of the PCE Price Index, which is detailed both comprehensively using all categories of PCE and excluding food and energy, which is known as the Core PCE Price Index.
Like most economic breakdowns, PCEs are split between consumer goods and services. The BEA reports the total value of personal consumption expenditures collectively every month. This is broken down by goods, durable goods, nondurable goods, and services.
Durable goods are pricier items that last longer than three years. Examples of durable goods include cars, electronics, appliances, furniture, and other similar items. Non-durable goods have a life expectancy that is less than three years. These items, which generally cost less, include things like makeup, gasoline, and clothing.
The BEA uses the current dollar value of PCEs to calculate the PCE Price Index. This index shows the price inflation or deflation that occurs from one period to the next. Like most price indexes, the PCE Price Index must incorporate a deflator (the PCE deflator) and real values in order to determine the amount of periodic price change.
Both the PCE Price Index and Core PCE Price Index (excluding food and energy) show how much the prices of personal consumption expenditures change from one period to another, but breakdowns of the PCE Price Index also show PCE inflation/deflation by category as well.
PCE vs. CPI .. The CPI is the most well-known economic indicator and usually gets a lot more attention from the media. But the Federal Reserve prefers to use the PCE Price Index when gauging inflation and the overall economic stability of the United States.
There are other indicators that are used to measure inflation, including the Producer Price Index and the GDP Price Index.
So why does the Fed prefer the PCE Price Index? That's because this metric is composed of a broad range of expenditures. The PCE Price Index is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. The CPI, on the other hand, provides more granular transparency in its monthly reporting. As such, economists can more clearly see categories like cereal, fruit, apparel, and vehicles.
Another difference between the PCE Price Index and CPI is that the PCE Price Index uses a formula that allows for changes in consumer behavior and changes that occur in the short term. These adjustments are not made in the CPI formula.
These factors result in a more comprehensive metric for measuring inflation. The Federal Reserve depends on the nuances that the PCE Price Index reveals because even minimal inflation can be considered an indicator of a growing and healthy economy.
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