Jul 27, 2022
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“Learning to fly is not pretty but flying is.” – Satya Nadella
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We’re nearly halfway through what has been billed as the most critical week of earnings season, and based on where futures currently reside, equities are down just marginally on the week. Don’t rest yet, though. Between today’s FOMC meeting, tomorrow’s GDP report, and some critical earnings reports on Friday, we still have a number of potential bumps on the horizon. Economic data released so far today has been better than expectations, and the only report left on the calendar is Pending Home Sales at 10 AM.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, a preview of the FOMC announcement today, economic data from around the world, and much more.
One of the primary reasons stocks have put up miserable performance numbers this year stems from the tighter monetary policy of the Federal Reserve. For that reason, we found it ironic that on all three days the FOMC has hiked rates this year, stocks rallied. On 3/16, the Fed kicked off the current rate hike cycle with a 25 bps increase in the Fed Funds rate, and in response, the S&P 500 rallied 2.2%. Seven weeks later, the size of the rate hike doubled, but stocks still rallied with the S&P 500 surging just under 3% in what turned out to be the second-best day of the year. Six weeks later on 6/15, in response to the mirage of surging inflation expectations in the Michigan sentiment report, the Fed dropped a 75 bps hike on the market and yet stocks still managed to rally with the S&P 500 rising 1.5%.
In other words, the S&P 500 is down 17.7% this year, but if you had only invested in the market on days when the FOMC hiked rates, you would be looking at a YTD gain of 6.8% in just three days. Conversely, if you had avoided the market on those three days and been long the rest of the year, you’d be down 23% YTD. Nobody ever said the market had to make sense.
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Jul 26, 2022
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“A good thing never ends.” – Mick Jagger
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We said it was going to be a busy week yesterday, and that didn’t even include the surprise earnings warning from Walmart (WMT) after the close. While WMT shares are down sharply, it’s surprisingly having little impact on the broader markets where futures are only modestly lower heading into the open. Where they finish the day will be another story, and then after the close, we’ll hear from Alphabet (GOOGL) and Microsoft (MSFT) which are likely to have a bigger impact on how markets trade tomorrow.
Outside of equities, longer-term Treasuries are rallying this morning and sending the 10-year yield down to 2.74% and flattening the 10y3m portion of the yield curve down to just 26 basis points (bps) and closer to inverted levels, but don’t worry “it’s different this time”. As mentioned above, WMT’s warning was somewhat out of left field, and the timing was interesting as it came right before this week’s Fed meeting. It will be interesting to see what, if any, impact the WMT news has on the thoughts of FOMC members.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, the geopolitical impacts of Pelosi’s planned visit to Taiwan, economic data from around the world, and much more.
First, it was Target (TGT) in May, but yesterday it was WMT’s turn to issue a rare earnings warning outside of its regularly scheduled quarterly earnings report. As noted in last night’s Closer, the company noted that “increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars”. In response to the warning, shares of the retailer plunged close to 10%, and if those levels hold into the opening bell, it will be the stock’s largest downside gap since the 1987 Crash. Including today’s decline at the open, today will be WMT’s second downside gap to make the top ten (since 1985) this year. The only other year with two entries on the list is 2020 in the middle of the COVID crash. There weren’t even two declines of similar levels during the Financial Crisis!
Looking at the chart below, it’s amazing to see how strong WMT was in the late 1980s and 1990s only to stall out, relatively speaking, at the turn of the century. Including dividends, WMT stock has had an annualized return of 4.32% from 12/31/99 through the opening bell today compared to the S&P 500’s gain of 6.5% over that same period.
While the largest downside gap since the 1987 crash may seem a bit excessive, keep in mind that as of yesterday’s close (before the warning was released), WMT was only down about 8% YTD and trading at a premium to the S&P 500 as investors viewed it as a port in the storm. At the opening bell today, WMT will be down less than 18% YTD, which is only slightly weaker than the S&P 500, with a valuation much closer to inline with the broader market. In bear markets, there are no ports.
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Jul 25, 2022
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“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” – Harry Truman
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The weather has been hot across much of the country the last several days, and that heat will move to the markets this week with a busy schedule of economic data, peak earnings season, and the FOMC announcing its latest policy decision.
Ahead of the kickoff of trading, equity futures and bond yields are modestly higher along with crude oil and copper. On the downside, Bitcoin is down over 3% while gold is flat. Over in Europe, Germany’s ifo index tracking the business climate fell more than expected as a recession looks increasingly likely.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, economic data from around the world, and much more.
With all the earnings and economic data on the calendar this week, investors will likely have a much better read on the economy and its direction on Friday. Several indicators have already pointed to the increased likelihood of a recession, and the yield curve has also been indicating a more precarious economic picture. While the spread between the yields on the 10-year and 2-year US Treasuries has been negative for three weeks now, the spread between the 10-year and the 3-month yields has yet to move to inverted levels. A few months ago, the relative steepness of the Fed’s preferred yield curve measure was cited as a reason why a recession was not in the cards. However, after flattening by nearly 200 bps to just 40 bps in the last three months, even this part of the curve (light blue line) looks much less comforting.
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Jul 22, 2022
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“The impossible could not have happened, therefore the impossible must be possible in spite of appearances.” – Agatha Christie
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Major US equities are heading into the last day before the weekend holding strong gains for the week. In addition to breaking above their respective 50-day moving averages, the S&P 500 is up 3.5% week to date while the Nasdaq is up over 5%. Futures for both indices are modestly lower this morning, but it could have been worse given some of the weak tech earnings since the close yesterday. Outside of equities, crude oil is lower while US Treasury yields are plunging with the 10-year yield down to 2.8% and the 3m10y treasury yield curve down to just 35 basis points (bps). It’s not inverted yet, but it’s moving quickly in that direction.
Things are pretty quiet given the Summer Friday, but enjoy the calm while it lasts. With earnings season ramping up next week, including reports from the four largest companies in the S&P 500, things could get rocky.
Today’s Morning Lineup discusses earnings news out of Europe and the US, the latest ECB decision, events in the Ukraine and Italy, and economic data from around the world including UK home prices and weekly US mortgage application data.
Crude oil is trading down over 1.5% this morning putting it on pace for the third straight day of declines of over 1%. That would be the longest streak of 1%+ daily declines since mid-March. As we type this, WTI is barely trading above its 200-DMA which is a level it has not closed below since last December. Current levels also coincide with where it was trading right before Putin invaded Ukraine back in late February. After briefly surging above $130 per barrel right after the invasion, crude oil has now declined nearly 28% from that peak. Look for these declines to start showing up in the monthly inflation numbers in the months ahead.
Energy stocks live and die by the price of oil (and natural gas), so it should come as no surprise that with crude oil down by over a quarter and natural gas still down from its early June high (although it has rallied sharply in the last two weeks), energy stocks have been under pressure. After peaking above $90 in early June, the Energy Select Sector SPDR (XLE) has pulled back more than 20%, and like WTI, is trading just above its 200-DMA and right around levels it was trading at prior to the Russian invasion of Ukraine. For both energy commodities and the stocks in the sector, their future direction will depend on the push of geo-political tensions and supply concerns versus the pull of increasingly weaker economic growth.
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Jul 21, 2022
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“I like liquor — its taste and its effects — and that is just the reason why I never drink it.” – Stonewall Jackson
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On this anniversary of the battle of Bull Run, the first major conflict of the Civil War, and as bulls wage another battle against the bear market trend, the above quote from Stonewall Jackson seems applicable. As investors and/or traders, it’s always important to recognize your weaknesses and take steps to avoid them. Those who tend to overtrade or get emotional in reaction to market headlines should take a step back and keep things in perspective. Earnings season is a time of heightened volatility where each major earnings report tends to get extrapolated to the broader economy until the next earnings report sends a different contradictory message.
The market has strung a number of good days together as bank stocks have rallied in reaction to their reports kicking the earnings season off on a positive note. Overall, results have generally been better than expected which has been a good sign. Next week, we’ll get into the heart of earnings season; not only will the pace of reports pick up, but we’ll also hear from the largest companies in the market.
This morning’s market tone is biased to the downside as all the major US averages are indicated to open flat to modestly lower, but there has been some volatility following news of the ECB’s 50 bps rate hike (hinted at earlier this week) hitting the tape. The big move has been in crude oil which is trading down over 4% and near its lowest levels since the first quarter as supplies from Libya ramp up and Russia has resumed the supply of natural gas on the Nord Stream pipeline. On the economic front, it’s a busy day for data with Jobless Claims and the Philly Fed report at 8:30 eastern and leading indicators at 10.
Today’s Morning Lineup discusses earnings news out of Europe and the US, the latest ECB decision, events in the Ukraine and Italy, and economic data from around the world including UK home prices and weekly US mortgage application data.
The rally we have seen in stocks over the last week has been a textbook example of risk-on. Take a look at sector performance below. Besides cyclical sectors leading while defensives have lagged, outside of the Energy sector, the leading sectors over the last week (Consumer Discretionary, Technology, and Communication Services) are also the ones down the most YTD. Conversely, sectors that have declined or seen the smallest gains over the last week have all outperformed YTD. On the topic of energy, while it has been a leader over the last week, today’s 4.5% decline in crude has the sector trading down 2.5% in the pre-market.
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Jul 20, 2022
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“The single observation I would offer for your consideration is that some things are beyond your control.” – Neil Armstrong
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It was over 50-years ago today that Neil Armstrong became the first human to walk on the moon. Stocks didn’t go into orbit yesterday, but the S&P 500 and Nasdaq did manage to finally break back above their 50-day moving averages, ending, for the S&P 500, what was the longest streak since the Financial Crisis. This morning, the tone is much more subdued as futures have given up earlier gains as investors digest the latest batch of earnings. On the economic calendar, the only report of note is Existing Home Sales, which is expected to show a modest decline relative to last month.
Today’s Morning Lineup discusses earnings news out of Europe and the US, major earnings reports, and economic data from around the world including UK home prices and weekly US mortgage application data.
Both the S&P 500 and Nasdaq broke some extended streaks of trading below their 50-DMAs yesterday. For the S&P 500, the streak ending at 60 trading days was the longest since the 72-day streak ending all the way back in 2008, and it was just the 19th streak of 60 or more trading days in the post-WWII period. Now the S&P 500 just needs to work up enough strength to get back to its 200-DMA which is still 10.7% above yesterday’s close.
The Nasdaq’s streak of closes below its 50-DMA was even longer at 68 trading days, although that was only the longest streak of closes below that level since the 69-day streak ending in January 2019. Before that you have to go back to the 72 trading day streak ending in December 2008 to find a longer streak. In the Nasdaq’s history dating back to 1971 there have now only been 15 streaks where the index traded below its 50-DMA for 60 or more trading days. Finally, while the S&P 500 is 10.2% below its 200-DMA, the Nasdaq is much further in the hole at 17.2% below its 200-DMA.
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