Soft Landing Hopes Drive Market to New Highs

Despite last week’s light trading due to the holiday-shortened week, the market performed quite well. Coming off of a down week in the week prior, last week the S&P 500 recovered and notched multiple new all-time closing highs. The Nasdaq joined the action as it also made multiple new closing highs on the week. The Dow, while finishing in the green for the week, still has remained rather muted and is still lagging both the S&P & Nasdaq indices. Last week’s bullish trading was spurred by a combination of rather dovish remarks from Fed Chair Powell coupled with a handful of economic reports delivering just the results that the market was looking for. In particular, the ‘Jobs report’, from the market’s perspective, could not have had better results. It signaled that the labor market is cooling, but not crashing by any means and also the unemployment rate ticked up slightly after the recent increase in initial jobless claims we have seen. This report provided further evidence to the market that the ‘soft-landing’ scenario, of easing inflation without also crushing the economy, is still certainly within our grasp. Now, despite the strong performance from the indices, the leadership in the market remains rather narrow. The leadership still remains highly concentrated in a smaller group made up of many of the largest stocks in the market. This is evidenced by the S&P 500 index outperforming the Equal Weighted S&P 500 index by roughly 13% thus far YTD. Additionally, as the S&P 500 was making numerous new highs last week, the NYSE Advance Decline index was not making new highs but rather trading sideways remaining rangebound. As we have stated before, this is not all bad in the short term and it has happened plenty of times before. Generally, in a bull market it will work itself out as the strongest mega-cap names will buoy the markets allowing for the smaller large caps to have a chance to begin to participate and ‘catch-up’ later-on. Taking stock of this bull market, it is still in good shape as 64% of S&P 500 stocks remain in a long-term uptrend and trading above their 200-Day moving average. As we start to have Q2 earnings come in, if companies deliver strong results, then we expect that the market will begin to see broader participation again as the smaller large caps begin to gain some traction.

This week we are back to having a full five-day trading week along with a fresh slate of economic data and earnings. This week we will get both CPI & PPI inflation reports from June as investors hope these reports will continue the recent trend of ‘cooler than expected’ inflation data. Additionally, we will get the weekly initial jobless claims data. This weekly report is notable to watch as it recently has begun to trend higher toward an elevated state. Finally, earnings season is back as we will hear from a few notable large-cap companies that are set to report their Q2 earnings toward the end of the week, including J.P. Morgan Chase & Co.

  • CPI – On Thursday, the BLS will deliver the new CPI (Consumer Price Index) data for the month of June. CPI is a gauge of price inflation at the consumer level. CPI measures the price inflation that consumers are faced with when purchasing goods or services.
    • In the previous month’s report, YoY CPI came in cooler than expected, at 3.3%. The June YoY number is forecast to come in at 3.1%, which would be the fourth consecutive monthly decline.
  • PPI – Following Thursday’s CPI report, on Friday, we will get the new PPI (Producer Price Index) data from the BLS. PPI is a gauge of wholesaler price inflation. This can be a good indicator of inflation to come as it is measuring the output cost at which producers have sold their goods.
    • In the previous month’s report, YoY PPI came in at 2.2%, well below expectations. June’s PPI is forecast to come in at 2.2% marking that there was no acceleration from May to June.
  • Initial Jobless Claims – The Department of Labor provides a weekly report that records new Initial Jobless Claims in the U.S. Over the past six months initial jobless claims have slowly continued to trend higher, however, still remaining below the recent high made last year in June. As long as initial claims remain consistently below 240K, this serves as a sign of continued health in the labor market. The past four weeks’ reports have come in right around 240K.
    • Thursday’s report is expected to show 239K new initial claims, which is roughly in line with the previous four weeks. Should this number continue to trend higher and stay elevated above 240K and approach 300K, expect this to upset some investors.

Federal Reserve Watch

Last week, we got the release of the ‘Fed Minutes’ from the recent June meeting. They were consistent with recent Fed messaging, that the FOMC will remain ‘data-dependent’ and hold rates at current levels until they have seen sufficiently convincing evidence that inflation is on a trajectory to return to their target range of 2.0%. In a speaking engagement last week, Chair Powell stated that he is pleased with the progress made on combating inflation, but, he wants to see some additional positive data come in before he is comfortable reducing rates. Given a few recent consecutive ‘cooler than expected’ inflation reports, this is building the body of evidence the Fed is looking for in order to be convinced that it is appropriate to begin cutting rates. If this recent trend persists and the rate of inflation begins to fall back toward the target range, expect the Fed to kick off their ‘cutting cycle’ later on this year.   

  • At the upcoming FOMC meeting scheduled for late July there is still little expectation that the Fed will opt to reduce rates at this meeting. Given that investors are all but convinced that the Fed will not cut in July, lets look beyond this meeting, on to the final three meetings of the year. Investors remain confident that the Fed’s rate cutting cycle will begin during the end of this year. With continued reports displaying pockets of economic slowing coupled with cooler than expected inflation data, markets are assigning a 77.9% probability that the Fed will opt to cut rates at the September meeting. Looking at current Fed Funds futures, investors feel we will end the year with the Fed’s policy rate in the range of 4.75%-5.00% which would be 50 basis points lower than status quo. This indicates that at present the market is anticipating two rate cuts this year. At market close on Friday, Fed Futures odds for the November & December meetings show that markets are pricing in the likelihood of a rate cut at 87.2% & 97.3% respectively.

This Week’s Notable Earnings

Towards the end of this week, earnings season returns as we will begin to get afresh wave of new earnings reports when companies start reporting their Q2 results. The first major company that we will hear from this week will be soda and snack giant PepsiCo, Inc. Following them, on Friday, Q2 earnings really get going as some of the major Financials begin to post their results including J.P. Morgan Chase & Co., Wells Fargo & Co., & Citigroup Inc.

  • With recent concerns about how the GLP-1 weight-loss drugs may be impacting soda & snack sales, investors are sure to be watching when PepsiCo, Inc. reports their Q2 results on Thursday prior to the opening bell. PEP is expected to post modest 3.4% YoY growth in Q2 earnings.
    • PEP earnings are expected to come in at $2.16 EPS.          
  • On Friday before the opening bell three major U.S. Financials are scheduled to post their Q2 earnings numbers. Analysts’ expectations are that JPM will report a slight YoY decline in Q2 earnings while both WFC & C are expected to modestly grow their Q2 earnings YoY.
    • JPM earnings are expected to come in at $4.13 EPS.
    • WFC earnings are expected to come in at $1.28 EPS.
    • C earnings are expected to come in at $1.41 EPS.   

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,

Blane Markham

Author, Weekly Market Periscope

Hughes Optioneering Team