Jul 29, 2022
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“The time to hesitate is through. No time to wallow in the mire.” – The Doors
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Stocks are looking to close out a strong week on a positive note this morning as S&P 500 and Nasdaq futures are indicated higher. Earnings have been the driver of the strength, and this morning we’re seeing positive reactions to reports from the likes of Apple and Amazon on the tech/growth side to Chevron and Exxon on the energy side.
We’re pretty much done with earnings for the week, but a number of economic reports are on the calendar. Employment Cost Index, Personal Income, and Personal Spending were all just released, and every one of them exceeded forecasts by 0.1 percentage points. PCE Deflator numbers were also just released and were exceptionally high relative to history but generally in line with or slightly higher than expectations. The initial reaction from the markets has been weakness in equity prices and higher yields in the Treasury market. Outside of these reports, the only others on the calendar are Chicago PMI and Michigan Confidence which will both be released after the opening bell.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, a detailed look at economic data from around the world, and much more.
With all that’s gone on this week and how lousy a year it has been for the equity market, it’s surprising that the S&P 500 heads into the final trading day of the week with a gain of nearly 3%. The performance of the four mega-cap stocks (Alphabet, Amazon.com, Apple, and Microsoft) this week has been equally as impressive. The table below lists every earnings season since 2015 that all four stocks reported earnings in the same week. Before this week, in each of the eight prior earnings seasons where all four stocks reported in the same week, there was never an earnings season when they all reacted positively the day after their reports, and the S&P 500 was only higher in that week two times.
That trend changed this week. GOOG and MSFT already reported and both rallied more than 5%. AAPL and AMZN, meanwhile, reported after the close Thursday, and both stocks traded higher after hours. Along with the gains in all four stocks, the S&P 500 is already up 2.8% on the week through Thursday’s close and indicated higher in the pre-market. As nervous as bulls were heading into the week with all the major events (earnings, FOMC meeting, Q2 GDP report) on the calendar, as often ends up being in the case with these types of situations, the bark turned out to be a lot worse than the bite.
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Jul 28, 2022
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“In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” – Mark Zuckerberg
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After Fed Chair Powell downplayed the significance of the initial read on quarterly GDP reports and then today’s negative print for Q2 GDP, conspiracy theorists will say yesterday’s comments were made so the Fed could downplay today’s negative print. Whatever. We now have seen two straight quarters of negative GDP, and while that may not meet the ‘official’ definition of a recession, it still doesn’t change the fact that the US economy shrank in the first half. Add to that, initial jobless claims remain right near their post-COVID highs. This morning’s print of 256K was above last week’s print of 250K, but last week’s reading was subsequently revised up to 261K meaning that claims actually fell this week.
Futures have actually rallied a bit since the 8:30 print of GDP and Jobless Claims, but they are still indicating a modestly lower market at the open. The Q2 GDP report was an important report, but who wasn’t expecting a weak print? More important than that report will be earnings reports from Amazon.com (AMZN) and Apple (AAPL) after the bell today.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, the potential budget deal between Manchin and Senate Democrats, economic data from around the world, and much more.
Even in the current volatile environment, a 4% rally in the Nasdaq is a big move. In the index’s entire history dating back to 1971, there have only been 86 prior occurrences, and yesterday’s rally was the largest one-day gain since early April 2020 just after the COVID crash lows. The chart below shows every 4% rally in the Nasdaq over its history since 1971, and outside of the period from 2000 to 2002, and to a lesser degree the Financial Crisis, moves of this magnitude were sporadic. The most notable aspect of the chart below, however, has to be the fact that in the 50+ year history of the Nasdaq, nearly half of all the index’s rallies of 4%+ occurred in the three-year window from 2000 to 2002.
Given the near majority of all 4%+ rallies in the Nasdaq occurred during the most severe bear market in its history, maybe big moves like yesterday aren’t such a good thing in terms of the Nasdaq’s future direction. In the chart below, we show the index’s forward returns following prior 4%+ rallies as well as 4%+ rallies, like yesterday, that were the first occurrences in at least three months. As shown in the chart, median returns following all 4%+ rallies (light blue bars) are mixed relative to overall average returns since 1971, but when the 4%+ rally is the first in at least three months, forward returns have actually tended to be above the historical average for all periods since 1971. It’s hard to say the coast is now clear following yesterday’s big rally, but historically speaking, big one-day rallies for the Nasdaq after a long absence have historically been followed by above-average returns.
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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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