July 22, 2024

Don’t judge each day by the harvest you reap but by the seeds that you plant.”
Robert Louis Stevenson

Folks, we are living through historic times, as I write these words, President Biden has succumbed to the intense pressure to withdraw, this past week we saw an assassination attempt on President Trump, an electric, unified Republican convention, Democrats hastily trying to find some credible answer to coercively removing their candidate on the eve of their convention. (Are these the seeds they planted 3 1/2 years ago? Are they now are reaping what they sowed?) Conspiracy theories and troubling facts are emerging in the void of limited information available to the public. The impact of all this on the financial markets remains to be seen. I will remind all that in times of uncertainty, always keep your wits and look at the numbers, ignore the noise. (In the next few weeks I am sure there will be plenty of that). On top of all this political upheaval, the massive outage linked to cybersecurity company CrowdStrike Holdings Inc. could be the largest ever seen after the issue caused disruption to Microsoft Corp.’s systems around the world. The good news, maybe the banking industry push for a cashless society will cool down, though I doubt it. But other than that, not much else happened (tongue firmly in cheek).

Let’s look at the numbers, after several weeks of positive markets and a robust 2024 so far, the markets worldwide sold off modestly and are waiting to see how events will unfold. The S&P 500 lost 2.36% for the week the Dow Jones Industrial Average gained a slight .37% The Nasdaq took a beating down 4.11%. Internationally, the FTSE 100 lost 1.18% and the MSCI-EAFE retreated -2.4%. The 2-year Treasury yielded closed at 4.49% and the 10-year narrowed the spread closing at 4.24%.

As Barron’s Megan Leonhardt reports, “while the Dow Jones Industrial Average set an all-time high, the Nasdaq Composite snapped a three-day winning streak and had its worst day in nearly two years.” The Dow closed at a record last Wednesday, gaining 244 points, or 0.6%. But the tech-heavy Nasdaq fell 2.8%—its biggest one-day percentage decline since December 2022. The S&P 500 was down by 1.4%. (This pullback is largely viewed as healthy as the Nasdaq has been quite hot.) The tech sector was under pressure last Wednesday as it faces threats of higher tariffs on exports of chipmaking equipment and concerns that U.S. policy toward Taiwan could shift under a new administration, former President Donald Trump said in an interview with Bloomberg BusinessWeek that the country should be paying for its own defense. Barron’s Tae Kim outlines the broad risks that could stem from a shift in Taiwan policy. The interview was fairly wide-ranging, with Trump telling the publication that he would allow Fed Chair Jerome Powell to serve out his term, which ends in 2026. But Trump warned the central bank about cutting rates before the November election.

However, Last Tuesday, fed-funds futures traders were pricing in a more than 50% chance of three quarter-point rate cuts from the Federal Reserve by December, which would take the main policy-rate target down to between 4.5% and 4.75% from a current level of 5.25% to 5.5%, according to the CME FedWatch Tool. It was the third session in a row in which those odds have been above even. These same traders indicate interest-rate futures market pricing implies overwhelming odds of a quarter-point interest-rate decrease by the Federal Reserve in September. But that is thanks to further expected progress on the inflation front, not because the economy will need rescuing. Point being, some powerful forces may clash later this summer.

While U.S. stock-market investors have cheered cooling inflation, some have worried it could be bad news for equities — as disinflation may take away companies’ pricing power and hurt their future earnings. But strategists at Bank of America Global Research suggest there is no statistical evidence to support the argument that disinflation could be a headwind to the financial health of American companies. “Last week’s soft inflation data confirmed that we’re on the path to [a] Goldilocks [scenario] … but there are concerns that disinflation is a growing headwind to earnings, as earnings are nominal and higher inflation drives stronger earnings growth,” said Ohsung Kwon and Savita Subramanian, equity and quant strategists at Bank of America, in last Monday’s client note. However, it’s demand and economic growth that drive corporate earnings rather than pricing — since pricing has simply been a lagging indicator with “no statistically significant relationship” to earnings, the strategists wrote. While a company’s revenue has shown strong correlation to both the consumer-price index and producer-price index, both had “absolutely no correlation” to earnings growth, Kwon and Subramanian said.

As Market Watch argues, “The big story in bonds has been how inflation and higher interest rates clobbered their performance by knocking valuations lower. U.S. Treasury yields rapidly rose during the Federal Reserve’s rate-hiking campaign from 2022, sending prices of the government securities down. But that is expected to soon change with a Fed pivot to rate cuts.”

What all this means is we need to look closely at what the data is telling us not the political noise we will hear.

Looking at consumer spending last week, Market Watch reports sales at U.S. retailers were flat in June because of falling gas prices and a cyberattack on auto dealers, but most other stores showed an increase in spending in a sign of a stable economy. Sales were unchanged last month, the government said Tuesday. They had been forecast to decline 0.4%, based on a Wall Street Journal poll of economists. A raft of recent reports suggests the economy has slowed and that consumers have cut back on spending. Yet there was no sign in the June retail report that these trends have intensified. If autos and gas are stripped out, retail sales rose a solid 0.8% last month, seasonally adjusted figures showed. And sales in April were revised higher.

On the other side of the pond, The U.K.’s rate of inflation was unchanged at the Bank of England’s target in June, leaving the door open for an interest-rate cut at its August meeting, despite concerns about rapid rises in services prices. In recent months, the headline rate of inflation has fallen mainly due to energy prices that have cooled on international markets. But core inflation–a rate of underlying inflation that excludes more volatile energy and food costs–is still well above the central bank’s 2% target, at 3.5%, the same as May. Again, making the case that foreign stocks should perform as the economic picture brightens.

As we go forward in these historic times, we remain vigilant and faithful to basic principles on investing in quality and value.

Mike