The Week in Review 8/1/22

It's a recession when your neighbor loses his job; it's a depression when you lose yours. - Harry Truman

Good Morning,

Anyone following the market last week has a right to feel exhausted, it was a huge of week of news that was ultimately matched with some big gains for the week that enhanced some huge gains for the month, which were driven in part by short-covering activity and a bid to add back exposure to equities following the brutal first half of the year.

Roughly 175 S&P 500 companies reported their results for the June quarter, the FOMC held a policy meeting, the economic calendar featured the Advance Q2 GDP Report, President Biden held a call with President Xi mainly to discuss Taiwan and Russia, Senator Manchin had a stunning reversal of position and reached an agreement with Senator Schumer on the provisions for the Inflation Reduction Act of 2022, and Congress passed a $280 billion bill, which included $52 billion for increasing semiconductor manufacturing capacity, that is designed to fend off competition from China. Our heads are still spinning!

In spite of some very poor news… a halting earnings warning from Walmart that was pinned on food and fuel inflation detracting from spending in general merchandise categories, a warning from Best Buy about a further softening in demand for consumer electronics, a warning from Stanley Black & Decker about weakening customer demand, the highest year-over-year reading for the PCE Price Index (6.8%) since 1982, the third straight monthly drop in Consumer Confidence, and a bleak New Home Sales report for June… we still enjoyed a very handsome week of gains!

Our markets looked beyond the bad news and focused on “better-than-feared” results and/or guidance from Alphabet, Microsoft, Apple, and Amaon.com, a marked drop in Treasury yields, and the idea that the weak economic data would compel the Fed to take less aggressive steps with future rate hikes.

The Federal Reserve was central to this week's action. It raised the target range for the fed funds rate on Wednesday by 75 basis points to 2.25-2.50%, as expected. Fed Chair Powell, however, did a commendable job at his press conference of walking the line between needing to be tough still on fighting inflation but conceding that it would likely be appropriate in coming months to slow the pace of rate increases given how frontloaded the rate hikes have been to this point.

He didn't rule out another 75-basis point rate hike at the September meeting. He said the data would dictate that decision. He also said that the Fed wouldn't be offering any clear-cut guidance like it had been doing but would instead let the data dictate policy decisions now on a meeting-by-meeting basis. There was ample room for interpretation in the wake of his remarks, but the prevailing view of the market was that Mr. Powell opened the door to the Fed taking a step down with its aggressive rate-hike posture. That was enough to launch a post-FOMC rally on Wednesday that was sustained through Friday's close.

Notably, the fed funds futures market is pricing in two rate cuts (yes cuts) in the first half of 2023, according to the CME's FedWatch Tool. Mr. Powell didn't say anything that supported such thinking, yet market participants have been seemingly clinging to an expectation that weakening economic data will be the pivot point for the Fed.

The second straight quarter of a contraction in real GDP (-0.9%) contributed to that view; meanwhile, the Treasury market moved in a direction that corroborated that thinking. The 2-yr note yield dropped nine basis points this week to 2.90% and the 10-yr note yield fell 14 basis points to 2.64%, leading to a further inversion of the 2s10s spread that is seen by many as a harbinger of weak growth and/or a recession.

In that vein, it would be remiss not to point out that growth stocks once again led this week's rally effort. The Russell 3000 Growth Index rose 4.9% versus a 3.4% gain for the Russell 3000 Value Index.

All 11 S&P 500 sectors gained ground this week with gains ranging from 1.6% (consumer staples) to 10.3% (energy). The latter closed out a huge week on the back of stronger-than-expected earnings results from Chevron and Exxon Mobil.

For the month, every sector advanced. Gains ranged from 3.1% (consumer staples) to 18.9% (consumer discretionary). A surge in Tesla and Amazon.com paved the way to that massive gain for the consumer discretionary sector, which is still down 20.4% for the year.

Altogether the Nasdaq Composite soared 12.4% in July followed by the S&P Midcap 400 (+10.8%), the Russell 2000 (+10.4%), the S&P 500 (+9.1%), and the Dow Jones Industrial Average (+6.7%). The S&P 500, which flirted with 3,600 in mid-June, closed July at 4,130.29.

Market Snapshot…

• Oil Prices – West Texas Intermediate crude advanced 3.4% to $99.67/barrel while Brent crude futures gained $2.89 to trade at $110.03/barrel.
• Gold – Gold bounced to a fresh multi-week peak on Friday with its safe haven allure getting a boost as the dollar gave up initial gains due to U.S. inflation. Spot gold rose 0.4% to $1,761.59 per ounce, while U.S. gold futures rose 0.7% to $1,762.09 per ounce. Silver finished the week at $20.197.
• U.S. Dollar – The dollar index was down 0.3% for the week closing at 105.83. The Euro/US$ exchange rate is now 1.036.
• U.S. Treasury Rates – The yield on 10-year Treasury note traded 2 basis points lower at 2.658%.
• Asian shares were higher in overnight trading.
• European Markets are trading in the green.
• Domestic markets are trading a bit lower this morning.

Earnings reports from energy companies like Chevron and Exxon were the stars of the show last week. These companies reaped the rewards of higher energy prices, increasing their revenues 68% and 53% respectively while boosting their net incomes by 350% and 100%. 

Many other companies also reported strong earnings bringing the growth rate for the quarter up to 6%. The initial projection called for a 4% increase. In total, 73% of reported companies in the S&P 500 have come in above EPS estimates and 66% have come in above revenue estimates _{(Source: Factset).} 

We will have another busy week this week with 160 companies reporting from the S&P 500. We will hear from Aflac, Caterpillar, DuPont, PayPal, Marathon Petroleum, and Amgen. 

So far earnings have been coming mostly above estimates and we expect that trend to continue. 

Have a wonderful week!

The opinions expressed herein are those of Michael Hilger and not necessarily those of Raymond James & Associates, Inc., and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forcasts will occur.  The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The information contained herein is general in nature and does not constitute legal or tax advice.  Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The Dow Jones Industrial Average (INDU) is the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The Dow Jones Transportation Average (DJTA, also called the "Dow Jones Transports") is a U.S. stock market index from the Dow Jones Indices of the transportation sector, and is the most widely recognized gauge of the American transportation sector.  Standard & Poor's 500 (SPX) is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value, and its performance is thought to be representative of the stock market as a whole.   The NASDAQ Composite Index (COMP.Q) is an index that indicates price movements of securities in the over-the-counter market. It includes all domestic common stocks in the NASDAQ System (approximately 5,000 stocks) and is weighted according to the market value of each listed issue. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. 

Dividends are not guaranteed and must be authorized by the company's board of directors.

Diversification does not ensure a profit or guarantee against a loss.

Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

The information contained within this commercial email has been obtained from sources considered reliable, but we do not guarantee the foregoing material is accurate or complete. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Charts are reprinted with permission, further reproduction is strictly prohibited.