Jul 19, 2022
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“Lots of companies don’t succeed over time. What do they fundamentally do wrong? They usually miss the future. I try to focus on that: What is the future really going to be?” – Larry Page
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After a disheartening late-day decline yesterday, futures are attempting a ‘turn-around Tuesday’ this morning. In addition to a handful of high-profile earnings reports from IBM, Johnson & Johnson (JNJ), and Lockheed Martin (LMT), we also just got the latest update of Building Permits and Housing Starts which came in mixed relative to expectations. Building Permits were slightly higher than expected and Housing Starts missed slightly.
Another notable report this morning was the latest Merrill Lynch Fund Managers Survey which showed widespread pessimism on the part of respondents. According to the report, exposure levels to risk assets were taken down to their lowest levels since the Financial Crisis while cash levels are higher now than at any other time since 2001!
Today’s Morning Lineup discusses earnings news out of Europe and the US, handicapping the ECB decision, and economic data from around the world.
Everyone wants to see inflation subside, and we welcome any sign of a pullback in upward price pressures. The latest datapoint optimists are glomming on to is the fact that the national average price of a gallon of gas dropped below $4.50 per gallon yesterday after touching $5 as recently as mid-June. That’s a decline of nearly 10%!
The move lower in gas prices is welcomed by us more than anybody, but before we all close the book on this chapter in the inflation saga and let our guard down, we should keep in mind that from a seasonal perspective, we are in what has historically been a relatively weak time of year for prices at the pump. Prices typically peak for the year around Memorial Day, trade sideways through the summer, and then decline into year-end. Second, while prices are down sharply after the last month, it follows what was a parabolic increase in prices year to date through mid-June.
Despite a 7.2% decline so far in July and a nearly 10% decline over the last month, the national average price of a gallon of gas is still up 9.3% over the last three months, 36.8% year to date, and 42% over the last year! That’s hardly a trend of lower prices. Moving further out, the percentage gains have been even larger. Over the last two years, Americans are paying more than double what they were paying for gas, and over the last three and four years, the average price has increased by roughly 60%.
We’re pleased as anyone with the direction of gas prices over the last month, but just as we’ve seen countless examples of the market or individual stocks in downtrends stage an impressive rally only to give it all back again, let’s hope this move lower in gas prices isn’t a false alarm in the other direction.
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Jul 18, 2022
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“Let me assert my firm belief that the only thing we have to fear is fear itself” – Franklin D. Roosevelt
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What was looking like a very strong start to the week a couple of hours ago is now looking more like merely a positive start to the week as S&P 500 futures went from up well over 1% to up about 75 basis points (bps). Given the market’s tendency to kick off the week on a down note this year, though, and positive start to the week is a win. Consider this, including today, of the 29 weeks so far in 2022, the S&P 500 tracking ETF (SPY) has only opened higher on the first trading day of the week ten times.
Economic data is light today with Homebuilder Sentiment the only report on the calendar. The pace of earnings will pick up as the week goes on, but already we’ve already had reports from Bank of America (BAC) and Goldman Sachs (GS). Neither company had any major landmines, and while BAC is flat in the pre-market, GS is up over 3%.
Today’s Morning Lineup discusses earnings news out of Europe, action in Asian and European markets, and economic data from around the world.
Last Friday’s rally helped to end what was a lousy week up until that point on a positive note. Heading into the day, the S&P 500 was down for five straight days, and even after the rally, finished the week down nearly 1%. But with a strong finish and futures trading where they are right now, both the S&P 500 and the Nasdaq are poised to erase just about all of last week’s losses at the opening bell.
There’s been an awful lot of bottom talk circulating over the last few days, and the charts of the Nasdaq 100 (QQQ) and S&P 500 (SPY) have been showing some positive signals as they both managed to make higher lows last week. There’s still a lot of resistance to work through on the upside, though, as the 50-day moving averages and prior highs from this summer loom above. Given the market’s tendency to disappoint bulls in prior rallies this year, traders are increasingly less likely to give the market the benefit of the doubt and give an all-clear.
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Jul 15, 2022
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“The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America.” – President Jimmy Carter 7/15/79
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43 years ago today, President Carter addressed the nation in what has become the now famous crisis of confidence speech. Today, we find ourselves in a very similar situation with rampant inflation and sentiment among Americans at multi-decade lows. Reading through Carter’s speech today, you would have thought he was talking about the present-day United States.
Unfortunately, from an economic perspective, Carter’s speech was followed by two separate recessions (the double-dip) in the next four years. The first started five months later in January 1980 and lasted just six months. The expansion that followed lasted only a year, and in January 1981 a second contraction began lasting 16 months in what at the time was tied for the longest recession since the Great Depression. On a more positive note, there have only been 35 trading days where the S&P 500 closed at a lower level than where it was at the time of Carter’s speech, and the maximum downside was 4%.
This morning, futures are indicated higher in what bulls hope will end a five-day losing streak for the S&P 500, but first, we’ll have to get through the July Empire Manufacturing report, Retail Sales, Industrial Production, Capacity Utilization, Business Inventories, and Michigan Confidence. In other words, look out for landmines.
Speaking of confidence, the Michigan Confidence index is at lower levels now than it was when Carter gave his ‘malaise’ speech and for that matter, at any time since the survey started in the late 1970s. As we all remember, in the preliminary release of that report last month, inflation expectations ticked higher leading to a more aggressive rate hike from the Federal Reserve. Ultimately, that uptick in inflation expectations was revised away, so that will be the key aspect to watch of that report today.
Today’s Morning Lineup discusses policy moves out of DC ahead of the midterms, earnings, news, action in Asian and European markets, and economic data from China.
Carter’s ‘Crisis of Confidence’ speech focused a lot on high energy prices and his proposals to help reduce the US dependence on foreign oil. Ironically, today President Biden is in the Middle East asking Saudi Arabia to pump out more oil into the global market. Thankfully for Americans, we’ve already started to see relief as oil prices are well off their highs from earlier in the year and below $100 per barrel. That has negatively impacted the Energy sector where prices have cratered in recent weeks. Just yesterday, the sector fell another 1.9% taking its peak to trough decline (on a closing basis) down to 26.3% which is actually five percentage points more than the S&P 500 is down from its peak!
In the process of yesterday’s decline, the Energy sector also closed below its 200-DMA for the first time in over 200 trading days (September 2021). While it has been nearly ten months since the Energy sector last traded below its 200-DMA, the streak that just ended wasn’t particularly extreme relative to history. As recently as early 2017, there was a slightly longer streak, and back in August of last year, there was a streak that lasted 185 trading days. The most extreme streaks for the sector occurred back in the late 1990s and early 2000s when there were two separate periods that stretched roughly three years each!
Following its 25% haircut, the Energy sector may have broken support at its 200-DMA yesterday, but it is also right around two other potentially important levels. As shown in the chart below, yesterday’s close coincided with the high from 2019 and is now only modestly above its uptrend line from late 2020 which began when the sector made a higher low following the COVID crash.
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Jul 14, 2022
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“I am struck that so many of our leaders in the U.S. forget how strong our country can be.” – Jamie Dimon
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The market has taken on a bit of a streaky vibe in the last few weeks. After four straight down days to close out June where the S&P 500 fell 3.2%, the month of July started out with a four-day win streak where the S&P 500 rallied 3.1%. Since those four days ending last Thursday, the S&P 500 has been down four straight days falling 2.6%. The current four-day losing streak looks like it’s going to extend to five days as futures are indicated another 1.35% lower.
Besides the litany of issues facing the market all year, the catalyst for this morning’s weakness is weak results from Conagra (CAG), JP Morgan (JPM), and Morgan Stanley (MS). CAG is down 2.5% after reporting weaker than expected EPS and lowered guidance, MS is only down fractionally, and JPM is poised to open more than 3% lower putting it on pace to fall in reaction to earnings for the eighth straight quarter.
The commentary from the earnings release for JPM wasn’t particularly uplifting:
“The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy. But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road. We are prepared for whatever happens and will continue to serve clients even in the toughest of times.”
In economic news, PPI came in higher than expected on both a headline and core basis, while initial jobless claims ticked up to 244K which was the highest level since last November. The rise in jobless claims hasn’t been particularly steep, but it has been consistent ever since, bottoming out in Mid-March.
Today’s Morning Lineup discusses earnings from JPMorgan (JPM) and Morgan Stanley (MS), moves in Asian and European markets, and economic data from around the world.
It’s not just stock prices that have been on the decline this week. Crude oil prices have fallen sharply and WTI briefly traded below its 200-DMA this morning as it trades down near $93. As shown in the chart, while prices did run up in anticipation of the event, all of the increases in crude oil prices since Russia invaded Ukraine have now been erased.
The fact that oil prices are back to levels they were trading at right before Russia invaded Ukraine has been taken as a win by investors, and we wish we could say the same thing about the S&P 500. Unlike crude oil, which has managed to return back to pre-invasion levels, stock prices have kept falling.
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Jul 13, 2022
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“Inflation is like toothpaste. Once it’s out, you can hardly get it back in again.” – Karl Otto Pöhl
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The big CPI report that everyone is waiting for is finally here, and most investors appear to be leaning on the side of a stronger-than-expected report. However, after two weak days for equities futures are indicated higher in early trading.
Update – The report was just released and headline CPI came in at 1.3% compared to the forecast for 1.1%. On a core basis, CPI rose by 0.7% compared to forecasts for growth of 0.5%.
Earlier this morning, the IMF cut its forecast for US GDP growth down to 2.3% from 2.9%. This news is notable for two reasons. First, it comes less than a month after the IMF downgraded its growth forecast down to 2.9% in late June. Second, given the indication from the Atlanta Fed’s GDPNow model, which is calling for a Q2 contraction of 1.2% following Q1’s decline of 1.6%, the US economy would need to grow by 3.2% in the second half in order to reach that goal. Based on the trend in recent data and the Fed’s tightening bias, that level of growth seems optimistic.
In today’s Morning Lineup, we discuss moves in Asian and European markets, Chinese trade data, and economic data from around the world.
The days of the monthly employment report being ‘the most important indicator’ are long gone, and the new flavor of the month is CPI. Unfortunately for bulls, the trend of recent reports hasn’t been particularly market-friendly. As we have highlighted repeatedly in recent months, the headline CPI report has rarely come in weaker than expected. In the two years through May’s report, there have only been two weaker-than-expected headline CPI reports, which is easily the lowest number over a two-year span in at least twenty years.
When times are tough, there’s a stage in the process where people think that if they only wish hard enough, things will go their way. Unfortunately, elevated levels of inflation are a reality economists can’t simply hope away by consistently low-balling estimates.
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Jul 12, 2022
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“The euro was born with great hopes. Reality has proven otherwise.” – Joseph Stiglitz
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As the European economy continues to crater given rampant inflation, geopolitical instability, and labor/supply issues, the collapse in the bloc’s currency continued overnight as the euro reached parity with the US dollar for the first time since December 2002. While the round number generates a lot of headlines, it really means little in the broader picture of a weak European economy and what looks to be an even weaker outlook in the months ahead.
Over here in the US, things don’t seem all that much better. The week has started off slowly in terms of economic data, but this morning’s report from the NFIB on small business optimism came in much weaker than expected at 89.5 versus estimates for a reading of 92.5. Would you believe that sentiment among small businesses is now lower than it was at any point during the COVID lockdowns? Admittedly, the NFIB survey does tend to lean Republican, so with Democrats in control of DC, it’s not a complete surprise to see sentiment so weak. Given the macro backdrop, though, you can’t fault small business owners for being pessimistic. The last time the headline index from the NFIB was as low as it is now was in January 2013 at the beginning of President Obama’s second term. With the NFIB report behind us, the focus will now shift to tomorrow’s CPI.
In today’s Morning Lineup, we discuss moves in Asian and European markets, the latest developments on the war in Ukraine, and economic data from around the world.
Here is a surprising aspect of recent market events. With what seems like a near-constant focus that the ARK Innovation ETF (ARKK) gets, we were surprised that given the near 7% decline in the ETF yesterday there wasn’t more attention given to the fact that it had one of its 15 worst days since its inception in late 2016. The chart below shows the performance of ARKK since the start of 2017, and we have included red dots to show each of the 15 largest daily percentage declines in the ETF’s history. In the five-plus years that the ETF has been trading, all fifteen of the largest daily percentage declines occurred in either 2020 or 2022. Even more surprising is the fact that seven of the fifteen largest declines have all occurred since the start of May. What does it mean when extreme moves become the norm?
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