MARKET RECAP

US stocks fell by 3.5% for the week and were down by 3.73% for August. International stocks dropped by 4.49% and bonds took a 3.04% hit. Oil dropped by 9.20% and the dollar increased by 1.68% for the month.

Stocks are currently selling at 17.4x 2022 estimates for the S&P 500 and 16.1x 2023 numbers. The 2023 numbers peaked on about June 17 and have declined by about 3.33% since then. Much less than what was expected, but there is probably more to come.

Employment increased by 315,000 jobs in August, down from 526,000 in July. The increase is still considered a solid absolute number but indicates some cooling in the job market. The unemployment rose to 3.7%, up from 3.5%, as more workers entered the labor force. Those seeking work are now at 62.4% compared to 62.1% in July. Average hourly earnings were 5.2% higher than one year ago, consistent with the prior month. And month over month, the increase was 0.3%.

The Group of Seven agreed to an oil price cap for Russian oil, and in turn, Russia suspended natural-gas flows to Europe, although they blamed the stoppage on repairs. The oil price cap relies effectively relies on insurance to enforce its terms. In order to get insurance, buyers would have to observe the price limit. Almost all insurance for these types of shipments runs through G7 countries.

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MARKET RECAP

The market’s wishful thinking that the Fed would step off the brakes earlier rather than later officially came to a close on Friday in Jackson Hole when Fed Chair Powell said that “We will keep at it until we are confident the job is done.” Powell made clear that there will be no pivot in strategy anytime soon and that the end goal is to get inflation back to the 2%. Fed officials have made projections that rates would need to get to almost 4% by the end of next year for that to happen. Stock plunged, with the Dow dropping by more than 1,000 points. The S&P 500 dropped by 3.4% and the Nasdaq by 3.9%.

For the week, the overall US market was down by 3.79% and bonds fell by 0.37%. Year-to-date, US stocks are down by 15% and international markets are off by 17.3%, bonds are in the negative by 9.88%.

Powell wants to avoid the mistakes of the 1970s and early 80s when the Fed didn’t follow through on interest rate increases and inflation remained a persistent problem until Paul Volker has to raise rates to very high level to break the cycle.

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MARKET RECAP

The stock market’s four-week winning streak came to a close as US equities fell by 1.47%. The cheery optimism that the Fed may apply the brakes to aggressive interest rate hikes was notched down a bit based on the release of the minutes from the Fed’s July meeting and comments from central-bank officials.

Bed, Bath & Beyond showed that even after the big sell-off in 2022, speculators were quick to go back to their old ways, as the stock was up by 122% since July 1 (despite any positive news), and then fell by 41% on Friday when it was revealed that billionaire Investor Ryan Cohen sold off his entire investment.

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MARKET RECAP

• US stocks up by 3.5% and international stocks by 2.8%, bonds by 0.40%.
• CPI was flat for the month, but up by 8.5% for the year.
• Apple now makes up 7.3% of the S&P 500 with a $2.7 trillion market cap.
• The market rally over the last four weeks is based on the thesis that inflation has peaked, that means a less aggressive Fed, lower interest rates, higher stock prices.
• Almost 90% of S&P 500 companies have reported earnings with a 5.2% overall increase.

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MARKET RECAP

The S&P 500 fell by 20.6% for the first six months of the year. At the time, we wrote, “the market has fallen at least 15% in the first six months of the year in 1932, 1939, 1940, 1962, and 1970, down by an average of 24.7% in those years. But stocks rallied in the back half of those years by an average of +21.2%.” At least so far, true to form, stocks went into rally mode, the S&P 500 gained 9.1% for July, the best performance since November of 2020. The monthly performance was helped by an ultra-strong week, US stocks were up by 4.2% and international stocks by 3.2%. Bonds increased by 0.69% as interest rates continued to fall.

Investors are counting on the old bad news is good news mindset. A slowing, or declining economy, means interest rates don’t need to rise as much, and interest rates cuts would happen sooner than expected. Also earnings have not been as bad as feared.

But it is still too early to call the all clear. There have been plenty of times when markets have gone back to test the lows, or even break them. Inflation is not done yet, the economy just banked two successive quarters of declining growth, with no clear signs of an economic pickup. Cutting interest rates too soon would be out of the 1970s playbook, a strategy that didn’t work so well in fighting inflation.

GDP declined by 0.9% in the second quarter. That marks the second straight quarter of declining GDP, the unofficial sign of a recession. Wages and benefits increased by 5.1% in the second quarter, compared to a year earlier, but that was short of the 9.1% increase in consumer prices. The wage and benefit increase was the most ever, since they started keeping records in 2001.

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MARKET RECAP

US stocks increased by 2.8% for the week, putting in its best performance in a month.  The international markets were up by 3.1%, and bonds jumped by 1.09% as interest rates fell sharply. But stocks did not close the week well, on Friday, the S&P 500 fell by 0.9% on disappointing earnings by Snap, which dropped by 39%. Meta and Alphabet fell in sympathy, registering drops of 7.6% and 5.6%.

S&P 500 companies have beaten estimates by 3.6% according to FactSet, lower than the five-year average of 8.8%. About 20% of companies have reported. But there is a chance that earnings growth will actually be lower when all is said and done, after backing out energy profits.

The Markit Composite Purchasing Managers Index fell into contractionary mode, registering a 47.5 score. Also, the Conference Board’s leading indicators turned negative. The composite PMI for Europe fell to 49.4 from 52.

Jobless claims continued their slow, but steady rise, with a 7,000 increase from last week to 251,000. The four-week average was up by 4,500 to 240,500. Continuing claims totaled 1.4 million and was up from 1.3 million the week prior. Guy Berger, the principal economist at LinkedIn said “It doesn’t look recessionary…but it’s definitely less good than it was before.”

The ECB raised rates by 50 basis points, bringing their key interest rate out of negative territory to zero. They also unveiled a plan to buy debt from the weaker countries.

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MARKET RECAP

• US stocks were off by 0.91% while international equities fell by 2.31%. Bonds increased by 1.01%. The yield on the 10-year dropped by 16 basis points but the 3-month yield increased by a whopping 30 basis points. The 2-year treasury bond (3.13%) is inverted when compared to the 10-year (2.93%), a possible recession indicator.
• Earnings season started this week and companies representing 6% of the S&P 500 market cap reported, excluding financials, earnings beat estimates by 3.3%. Financials did not fare as well, JP Morgan and Wells Fargo missed estimates. JPM froze its buyback program and increased its capital cushion for potential future credit losses. WFC and Citibank did the same, setting aside hundreds of millions for possible future credit losses. Citibank Chief Executive Jane Fraser said, “While sentiment has shifted, little of the data I see tells me the U.S. is on the cusp of a recession…so while a recession could indeed take place over the next two years in the U.S., it’s highly unlikely to be as sharp a downturn as others in recent memory.”
• Inflation clocked in at 9.1%, the highest number in the last 40 years, and worse than expected. Grocery prices were 12.2% higher. Inflation is a backward looking indicator, but it was hard to find anything good in the report. The only good news, not reflected in this report, is that commodity prices have been falling hard in the last few weeks. Gas is now $4.577 per gallon compared to a June 14th peak of $5.016, according to the AAA.
• Retail sales were up by 1% in June, but that trailed the 1.3% increase in consumer prices. The sales numbers showed that for the most part, consumers are hanging in there with higher prices.
• The Fed said that manufacturing output fell for the second straight month in June. Home construction is slowing. And the University of Michigan index of consumer sentiment was close to the lowest level on record.
• Initial jobless claims were 244,000, up from 235,000. The number is still low historically has been been very slowly trending higher.

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• Stocks rallied on the week with the S&P 500 advancing by 1.95% for the week. Many of the high-flyers which have been battered this year, staged a comeback, with the ARK Innovation ETF (ARKK) rising by almost 14%, while this year’s winners, the energy stocks, continued their recent fall. The Energy Select SPDR (XLE) declined by 2.25% for the week and is down by 23% since its June 8th closing high.
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• The ISM non-manufacturing PMI fell to 55.3 in June from 55.9 in May, a smaller fall then expected, indicating the economy may not be falling as fast as some fear. The consensus was for a drop to 54.3.
• It was another strong jobs report, as employers added 372,000 jobs in June, much better than the 250,000 estimate, although slightly lower than the 400k average for the previous three months. The report ran counter the popular narrative that the economy is falling fast. The unemployment rate stayed the same at 3.6%. Average hourly earnings increased by 5.1% compared to the prior year. The labor force participation rate dropped to 62.2% from 62.3% in the prior month.
•  The 2-10 yield curve remained inverted this week, even as the 10-year yield increased to 3.1%, up by 11 basis points.
• Auto loans are beginning to default Subprime repossessions have almost doubed since 2020.
• The euro is down 10% this year and hit a 20-year low versus the US dollar.
• Gas prices have fallen for 24 straight days and is now priced at $.72 per gallon, according to OPIS, as opposed the its peak of $5.02 per gallon on June 14. Down by 6%. Strong demand for the rest of July will put add to pressure for higher prices.
• Elon Musk called off his deal for Twitter, citing fake user accounts, an issue he knew about before-and. Twitter will sue Musk seeking to enforce the deal. The stock market isn’t buying it, it never has, Twitter has been selling at about $37/share compared to the buyout price of $54.20.

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MARKET RECAP

Stocks posted their worst 6-month start to the year since 1970 as the S&P 500 fell by 20.6%, the Dow was down by 15.3% and the Nasdaq Composite fell by 29.5%. There was no safe haven in bonds, the aggregate dropped 10.7%. Oil was up by 40%. For the week, US stocks fell by 2.35% and international stocks by 1.66%. The bond market rallied on lower interest rates, up by 1.46%.  Earnings estimates are starting to fall but the changes have been small so far, that is likely to change going forward.

The market has fallen at least 15% in the first six months of the year in 1932, 1939, 1940, 1962, and 1970, down by an average of 24.7% in those years. But stocks rallied in the back half of those years by an average of +21.2%.

The average gallon of gas was $4.84 on Friday, compared to $3.12 last year, but down from the June 14th peak of $5.02, according to OPIS, an energy-data and analytics provider. Despite high gas prices, travelers are hitting the road in record numbers this July 4th, according to the AAA. That is in line with the June momentum, with record rentals for Airbnb and strong hotel results.

But manufacturing demand is beginning to slow down, in response to high prices. Activity at US factories grew at the slowest pace in two years, according to the Institute for Supply Management’s purchasing managers index. The index was measured at 53, down from 54.9 in June. A number above 50 is considered expansionary, below contractionary. New orders were measured at 49.2 and declined for the first time in two years. The Employment index was 47.3 and fell for the second month in a row. In a bit of good news, the measure of prices paid fell to 78.5 from 82.2 in June.

Auto sales were generally down around 15%, GM said nearly 100,000 vehicles in Q2 could not be delivered because they lacked computer chips.

The Atlanta Fed’s GDPNow is estimating Q2 growth at negative 2.1%.

Amidst the global shortage of oil, the Biden administration announced that it would allow up to 11 oil leases offshore, in the Gulf of Mexico and Alaska, while blocking leases in the Atlantic and the Pacific. Predictably, the proposed plan drew immediate condemnation from environmental groups for allowing any drilling at all and from oil advocates, that it didn’t go far enough.

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