Stocks rallied big on Friday, spurred ahead by outsized earnings from past market-loves Apple and Amazon – the romance is rekindled. Consumer sentiment remains slightly positive, and prices surged in June, according to the latest raft of economic releases.
The final shoe. Now we are cruising. Bulls have proven that they can still take up the horn against recently dominant bears. Though I have no actual quantitative data to back this, I am sure that 50% of the talking heads on [insert your favorite financial news channel here] will say that stocks have bottomed out and the rally will continue, and the other 50% will say that this recent bounce is simply a bear market rally, and that more downside is imminent. In other words, they are completely useless. You knew that already. Let’s take a look at what WE know and attempt to come up with our own thoughts on the matter.
First off, Gross Domestic Product (GDP) in the US has declined for 2 consecutive quarters. By some estimates that puts us in a technical recession. There is lots of debate whether the US is actually in a recession because there is no official NUMERIC definition. The commonly accepted rule of thumb is the 2 consecutive quarters of GDP decline. Of course, there is a highly regarded private agency that will tell us in many months from now whether or not IT believes the US was in a recession in the 1st half of the year. In reality, whether or not it officially gets the title, it doesn’t really matter. What does matter is GDP has declined. Moreover, does that decline portend painful job cuts and continued high inflation in the quarters to come. For stock investors, does that mean more painful drawdowns in their portfolios?
Let’s continue with our fact pattern. Inflation is a large contributing factor to today’s economic situation. Inflation was already on the climb resulting from strong post-lockdown demand and supply chain problems when the war in Ukraine turbo-charged its upward path. Not only did this make life untenable for us everyday consumers, but it awoke the sleeping-at-switch Fed, which found itself in the difficult position of having to raise interest rates at a pace not seen since the mid-1990s. We all thought that those days were behind us, didn’t we? Well, the Fed is now on its feet, on its front foot to be more exact, with its hand on the switch having raised interest rates by some +225 basis points in just 4 moves spanning 4 months. Well, despite those valiant efforts… inflation is still a problem…or was still a problem in June, based on the most current reports. If we look over to the commodities markets, one of inflations key drivers, we can see that many of the perpetrators have pulled back in July, namely gasoline, grains, and industrial metals. To be clear, there are no signs that inflation is going away or gone, but lower input prices should take some of the edge off consumers pain and some of the pressure off the front-footed Fed.
On the topic of the Fed, it has been raising interest rates to tackle inflation. This is hopefully well understood by now. Those rate hikes are already biting in corporate debt finance and in consumer credit-based purchases. That is what the Fed is hoping for – it wants to force consumers and companies to demand a bit less and hopefully allow inflation to ease. The latest GDP report shows that consumption grew last quarter, though it shifted from goods to services, but corporations pulled back on investment considerably. In other words, the Fed’s tightening is starting to work. Fed Chair Jerome Powell told us last week that he believed that it “may be appropriate to slow rate hikes down in the future,” in order to see the full effects of the tightening. Markets believe that the Fed will be forced to pivot and slow the hikes down, especially in light of the recent declines in GDP. This is evident in the Fed Funds future market which lowered its year-end rate projection by -25 basis points in the past week alone. This loosened the shackles on the more interest-rate-sensitive growth stocks and allowed them to rally into the close of July. We still do not know what the Fed will do in September which is a long way off in economic terms. The markets as of today are expecting a smaller +50 basis point hike on 9/22. But lots can change in the weeks to come. Our first read of July’s inflation will come next week on August 10th with the CPI release, which is expected to have receded to +8.8% from +9.1%. The Fed will surely be watching it closely.
Now, and finally, on to that third shoe waiting to drop. No recession is the same, and as I declared earlier, it doesn’t really matter what they ultimately call this period of negative growth. We do know that recessions are more painful when they are accompanied by high unemployment. At the moment, the employment situation appears to be healthy and resilient. There are plenty of job openings and the rate of unemployment is just above all-time lows. In the week ahead, we will get the very latest reads of job openings (JOLTS – tomorrow) and the monthly employment situation (Unemployment Rate – Friday). If these numbers remain strong, the Fed has a better chance of achieving that nirvana state referred to as a soft landing, in which the economy slows down by enough to cool inflation while keeping the economy from collapsing. If by collapsing we mean pain and rampant unemployment, we will get our first clues this week. Stocks will surely respond to these new facts as they emerge, and some, if not most of those confident talking heads will change their predictions. They will still land 50/50 bearish/bullish for stocks…still not useful to you and me.
WHAT’S SHAKIN’
Target Corp (TGT) shares are higher by +2.0% in the premarket after being upgraded to OVERWEIGHT from EQUAL-WEIGHT by Wells Fargo, the equivalent of being upgraded to a BUY rating from NEUTRAL. Wells Fargo also raised Target’s price target along with Jeffries analysts. The company has been under pressure from consumers shifting their dollars away from high margin goods into higher-priced food. It will announce earnings August 17th. Dividend yield 2.64%. Potential average analyst target upside: +12.8%.
PerkinElmer Inc (PKI) shares are trading higher by +1.38% after the company announced that it beat EPS and Revenue estimates by +14.81% and +2.15% respectively. Additionally, the company raised Q3 estimates and boosted full year earnings guidance beyond analysts’ previous estimates. Dividend yield 0.18%. Potential average analyst target upside: +9.7%.
FRIDAY’S MARKETS
Stocks rallied on Friday after a positive earnings announcement from Apple and Amazon.com made it OK to love mega cap tech stocks once again. The S&P500 gained +1.42%, the Dow Jones Industrial Average climbed by +0.97%, the Nasdaq Composite Index jumped by +1.88%, and the Russell 2000 Index advanced by +0.65%. Bonds traded higher and 10-year Treasury Note yields lost -2 basis points to 2.64%. Cryptos added +0.43% and Bitcoin slipped by -0.34%.
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