The Week in Review 7/5/22

“The riskiest strategy is to try to avoid risk altogether.” ~ Fredrick W. Smith

The first day of July was a good one for the stock market, and hopefully a harbinger of better things to come in the second half of 2022.

Still, it was not enough to save the stock market from another losing week that encompassed the worst first half of a year for the S&P 500 since 1970.

The main story lines were all too familiar…

There were concerns about economic growth, earnings growth, inflation, and central bank rate hikes. There was notable weakness in the mega-cap stocks and semiconductor shares. There was notable relative strength in the energy sector and the counter-cyclical sectors.

The S&P 500 declined 2.2% last week and the Nasdaq Composite sunk 4.1%.

The Philadelphia Semiconductor Index plummeted 9.6%. The S&P 500 energy sector gained 1.3%. Meanwhile, the S&P 500 utilities sector jumped 4.1% while the S&P 500 health care and consumer staples sectors rose 0.4% and 0.3%, respectively.

This week had its challenges, including another dump of cryptocurrencies after the SEC blocked Grayscale's bid to turn its bitcoin fund into a spot ETF. 

The yield on the 2-yr note sank 23 basis points to 2.83% while the yield on the 10-yr note dropped 24 basis points to 2.89%. Those moves were catalyzed by some disappointing economic data that included a weaker-than-expected Consumer Confidence Index for June that featured the lowest reading for the Expectations Index (66.4) since March 2013 and a bump in the year-ahead inflation expectation to 8.0% from 7.5%.

That news was followed later in the week by the Personal Income and Spending Report for May, which featured a 0.4% decline in real personal spending and a still elevated 4.7% year-over-year change in the core-PCE Price Index, and the softest ISM Manufacturing PMI reading for June (53.1%) since June 2020.

Taking a cue from some of these inputs, the Atlanta Fed's GDPNow model estimate for real GDP growth in the second quarter was cut to -2.1% from -1.0%. The third estimate for Q1 GDP, released earlier in the week, showed a 1.6% decline in real GDP. If real GDP in Q2 is in fact negative, it will fit the technical definition of an economy being in recession.

The weak data notwithstanding, Fed commentary during the week still leaned to the hawkish side. San Francisco Fed President Daly (not an FOMC voter this year) started things on Monday with an acknowledgment that she sees scope for additional tightening beyond the neutral rate. Cleveland Fed President Mester (FOMC voter) said she supports a 75-basis point rate hike at the July meeting if conditions remain the same (note: that was before the real PCE and ISM numbers).

Fed Chair Powell, meanwhile, told an ECB Forum that the importance of fighting inflation is worth the risk of slowing economic activity too much since failing to restore price stability would be the bigger mistake.

Even so, the Treasury market and the fed funds futures market downgraded their views with respect to the Fed's policy trajectory. That didn't seem to provide a lot of support to stocks, however, given that it was based on an expected bad economic outcome that won't bode well for earnings growth.

On an earnings related note, semiconductor maker Micron issued fiscal Q4 (Aug) revenue and EPS guidance after Thursday's close that was well below consensus estimates and which it attributed to a weaker demand environment for smartphones and PCs. 

General Motors followed Friday morning with a reduced Q2 net income outlook that it pinned on supply chain problems that adversely impacted its wholesale volumes in Q2. Importantly, GM reaffirmed its full-year guidance ranges.

This news was absorbed along with the soft ISM number, yet the stock market managed to score some needed gains on Friday in front of the holiday weekend. 

The resilience on Friday was presumably helped by new money being put to work on the first day of a new month and the price action itself, which is to say there were ample news catalysts to fuel further downside action, yet prices still moved higher, creating a sense that the bad news -- or most of it -- has been priced in to a large extent already.

The rebuttal to the latter point, however, would be the performance of the Philadelphia Semiconductor Index. It was down 33.9% for the year entering Friday, and yet it fell another 3.8% in Friday's trade in the wake of Micron's warning and a Digitimes report that Taiwan Semi has seen major clients reduce their orders.

The economy looks like it is cooling off… will this change the Fedspeak to less hawkish? Can they pull off a “soft landing” for the economy? Those are the big questions that need to be answered.

Some market experts believe we will need to see a crescendo in the VIX or “Fear Index” of a reading of 40 or higher to turn this market around… we don’t know about that but with all the volatility of late we are seeing readings tickling 30, which is historically high.

Our markets look to open weaker this morning… let’s see if they can “circle the wagons” and turn it around like the end of last week.

Have a wonderful week, stay cool!

Michael D. Hilger, CEP^®
Managing Director
Senior Vice President, Wealth Management

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