The Week In Review 8/8/22

“Economics is extremely useful as a form of employment for economists.” - John Kenneth Galbraith

Good Morning,

July was very good to us and August is starting off on the right foot as well!

Things started on a somewhat weak note last week…. there were some assumptions that the market would face selling pressure after the huge move it made in July. That rang true in the first part of the week but not so much in the latter part of the week.

Fittingly, market participants got over the selling hump on Wednesday (hump day), which proved to be the big difference in making this another winning week.

The cautious start to the week coincided with a relatively weak ISM Manufacturing Index for July, a sizable drop in oil prices on demand concerns, and saber-rattling by China in front of an expected visit to Taiwan by House Speaker Pelosi.

The latter visit happened on Tuesday, but China's initial response wasn't deemed proportional to the bluster it was expressing in front of the visit. China ultimately announced that it would hold live-fire military exercises near Taiwan. On Friday, China announced that it will be sanctioning Ms. Pelosi and her family, and cutting back on cooperation with the U.S. on certain matters like climate change initiatives.

The lack of a more consequential response was a catalyst for a broad-based rally on Wednesday, which also featured strong leadership from the mega-cap stocks and another sizable drop in oil prices.

This was in spite of OPEC+ saying it was going to raise output in September by 100,000 barrels per day versus July and August when it increased its production quota by 600,000 barrels per day.

WTI crude prices slumped below $90.00 per barrel this week, settling Friday at $88.73 per barrel. That move undercut the energy sector, which was the worst-performing sector this week with a 6.8% decline (including a 2.0% gain on Friday). The best-performing sectors were the information technology (+2.0%), consumer discretionary (+1.2%), and communication services (+1.2%) sectors. The mega-cap stocks were influential sources of support at the index level most of the week.

Growth stocks continue to recover…

Switching gears, there was a ton of earnings news last week. The companies reporting didn't have the cachet of last week. Nonetheless, we continue to see better-than-feared results, which was still good enough to keep buyers interested.

The earnings news took a backseat to the July employment report as the week progressed. There was some skittishness ahead of that report given the manner in which it could shape the market's perspective on the path of Fed policy.

The report ended up being much stronger than expected. Nonfarm payrolls increased by 528,000, the unemployment rate fell to 3.5%, and average hourly earnings were up 5.2% year-over-year.

The key takeaway was that it removed the friendly notion that the Fed might turn friendly with its monetary policy decisions sooner, rather than later.

The Treasury market took that view to heart… the 2-yr note yield, which hit 2.80% earlier in the week and stood at 3.05% right in front of the report, settled Friday's session at 3.23% (up 33 basis points for the week). The 10-yr note yield, which hit 2.53% earlier in the week and stood at 2.70% right in front of the report, settled Friday's session at 2.84% (up 20 basis points for the week).

Initially, the stock market was rattled by the report and the move in market rates, but it eventually found its footing and put together a nice rebound effort. Friday's session did not culminate in gains for each of the major indices, but the overall performance was better than what many feared it would be based on the shifting rate-hike expectations.

Prior to the report, the fed funds futures market was assigning a 34% probability to a 75-basis point rate hike at the September FOMC meeting. That probability shot up to 68.5%, according to the CME's FedWatch Tool, in the wake of the report.

The relative resilience of the stock market after the employment report squashed its seemingly preferred outcome (i.e. weak data could suggest that the Fed might be lowering rates in the first half of 2023) likely revolved around two, alternative takes on the data:

1. The continued strength of the labor market shows that the economy can handle the Fed's rate hikes without devolving into a hard-landing scenario, or
2. Employment is a lagging indicator, and given the lag effect of the Fed's rate increases, there will be much weaker numbers in coming months that will invite a friendlier shift in monetary policy sooner rather than later

It is hard to say what the ultimate driver of sentiment was, but because the market stood its ground for the most part after the report, the S&P 500 scored its third straight winning week.

Market Snapshot:

• Oil Prices – West Texas Intermediate crude rose 0.5% to settle at $89.01/barrel while Brent crude futures finished 0.85% higher to trade at $94.92/barrel.
• Gold – Gold futures ended lower Friday, with gold for December delivery falling 0.9%. Spot gold fell 0.92% to $1,774.97 per ounce, while U.S. gold futures eased 0.87% to $1,791.1 per ounce. Silver finished the week at $19.842.
• U.S. Dollar – The dollar index rose 0.8% for the week closing at 106.57. Euro/US$ exchange rate is now 1.03.
• U.S. Treasury Rates – The yield on 10-year Treasury note jumped 16.4 basis points to 2.838%.
• Asian shares were mixed in overnight trading.
• European Markets are trading in the green.
• Domestic markets are trading higher this morning.

Last week was another busy one on the earnings front and included several earnings surprises across the spectrum. In the tech space, Advanced Micro Devices beat on both top and bottom lines and increased revenues 70% YoY. In the energy space, Marathon Petroleum Corp. crushed earnings estimates by 25%, supported by record demand for fuel and refined products.

In total, 87% of the S&P 500 have reported earnings so far with a blended earnings growth rate of 6.7% _{(Source: Factset).}

Companies are continuing to beat estimates but are continuing to cite inflationary pressures and supply chain issues as headwinds for next quarter and beyond.

This week will be a bit lighter as we move toward the end of the season. Twenty-six companies will be reporting this week, including Akamai, Sysco, Fox, and Dominion.

This week, we will also get July’s CPI and PPI reports as well as the University of Michigan’s consumer sentiment report. With the decline of gas prices last month, we should see some decline in the headline CPI. Expectations are for an 8.7% YoY increase. CPI and PPI data will be among the factors the Fed will look at during their next meeting in September as it decides what interest rate hike level is appropriate.

Current odds show a 69% chance of a third consecutive 75 bps. hike, an unprecedented action.

Have a fantastic week, we are finally off to Fayetteville to beat (some of) the Texas heat… we will have our eyes wide open!

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