“Damn the Torpedoes, full speed ahead!”
Admiral David Glasgow Farragut
Well, it seems the Bulls are on board with the admiral, but first the numbers. Last week closed another good week for all of the major markets, the S&P 500 added +2.4%, The Dow Jones Industrial Average was up +2.3%, Nasdaq continued its run adding +3.3%, MCSI-EAFA world index gained +3.5% and the FTSE 100 joined the crowd up +2.3 %. 10-year treasuries yield 3.95%, 2 year 5.21%.
It seems the Bulls are having their way. Why? Last few weeks we were looking to a number of data points and last week investors were very happy to see good news on the inflation front. Major banks beat expectations and consumer sentiment numbers were all improved. Meaning investors think that consumers are gaining optimism and therefore will keep spending to keep this economy moving along. As usual, the devil is in the details. The core inflation rate was 3.2%, JP Morgan Chase, Wells Fargo and Citigroup all delivered better than expected earnings, while the University of Michigan consumer sentiment (77.6 up from 64.4 with expectations of the number of 65.5) was at the highest level since September of 2021.
Investors are feeling better about inflation and the tide seems to be turning to the belief that, after the July expected increase of 25 basis points, the Federal Reserve may stop any further rate increases this year. Leaving the Fed Funds borrowing rate at 5.50% at the most by the end of this year. This “hope for the best attitude” seems to permeate Wall Street. Import prices were down 6.1%, booking the biggest decline since 2020, meaning things are supposed to be getting cheaper. The reason is moderating US inflation rates, helped by stability in fuel prices this summer, and optimism the worst may be behind us.
The problem is leading economic indicators, bond markets inverted yield curve, and 218,000 tech workers who have lost their jobs in 2023 despite the big 7 tech companies leading the rally.
Considering the year-to-date performance, which has happily been very good, why with this conflicting data, which is still signaling red flags for a recession later this year, is the market moving higher? We are still of the opinion that core data will eventually take this market to its correct levels, so guarded optimism, not sunshine and rainbows is the prudent course in investment decisions.
Looking ahead this week, 60 of the S&P 500 firms are scheduled to report plus economic releases will include retail data and the numbers for the US housing market.
We will see if the consumer sentiment actually matches the expected spending. Tuesday, we hear from Morgan Stanley, Bank of America, Lockheed Martin, and Prologis. Wednesday it’s Tesla, Goldman Sachs, IBM, Netflix, and United Airlines. Thursday, Taiwan Semiconductor, Johnson and Johnson, Newmont Mining, and American Airlines, finally, on Friday, American Express.
As you can see from these names in the variety of industries, we should get a very good idea how the economy is doing. One other key number will be the US Census Bureau retail sales data for June. Economist consensus is looking for an increase of 0.4% a tenth of a point more than May.
We expect to continue our cautious optimism but still believe a mild recession is in the making, in fact, is probably already here, based upon the continued pain at the pump, grocery store, the media rosy interpretations, and corporate layoffs in industries that are supposed to be doing so well. Just remember a company’s biggest cost is generally labor. To improve the bottom line for the shareholders in a retracting economy, it lays off people.
As the yield curve narrows, we will move a bit later to longer maturities in quality bonds and continue to move toward value stocks. One final comment, we remain well diversified across all asset classes and are convinced that the market rotation is in full swing, value just is beginning to catch up.
Mike
