Biden Bows Out, Stocks Bend Lower, and an Earnings Bonanza

Markets have gone through quite a bit over the past few weeks. There was the rally that only extended further after the presidential debate three weeks ago. After the poor performance by current President Joe Biden at that debate, some pundits, myself included, wondered aloud if markets were trying to price in the less-restrictive regulatory policies that former President Donald Trump would implement should he and his party have better chances of winning in November than previously expected.

Then we had some lousy macro economic data that pushed along the narrative for likely interest rate cuts in the near future. Markets loved that, but then along came a ferocious rotation out of mega-cap tech stocks and into the unwashed 493 - and many smaller cap stocks. Finally, late last week, equities of all types sold off, mega, large and small caps alike. Does anything change now?

Then, on Sunday afternoon: President Joe Biden had decided to put an end to his bid for reelection. This news came to the surprise of no one and yet was shocking for the mere magnitude of what was unfolding. Biden did not resign his post but will not seek all but already won Democratic Party nomination for reelection. The president wrote that he would put all of his energy into fulfilling his current term, a term that concludes at noon on Inauguration Day, Jan. 20.

President Biden did endorse his serving Vice President Kamala Harris to succeed him as the Party's nominee for president, which would be the easiest path as far as the funds already donated are concerned, as Harris was already on the ticket. A number of key Democrats joined Biden in showing such support, including former President Bill Clinton and his wife, former Secretary of State Hillary Clinton. Other key Democrats, including former President Barack Obama have not yet shown support for Harris, nor have they endorsed anyone else.

Does This Matter to Financial Markets?

It might. If markets had indeed started to price such a reduced regulatory environment that a second Trump presidency might bring forth, especially if there were a Republican sweep of the legislature, then yes. I think to a degree, the likelihood of these events may have to be repriced, as one would think that this move re-energizes Democratic Party voters and independents who were wary of a candidate in an obvious state of cognitive decline.

I think this may put purple states that were looking red back in play, while also putting blue states that were looking purple back in their usual positions. In short, depending on how well the Democratic Party handles this, the projected electoral maps that I have seen may very well appear more competitive than they have. It's less than a month until the Democratic Party Convention kicks off in Chicago. The Republican Party Convention drew large ratings last week, as that party's obvious nominees had just barely survived an attempted assassination only days earlier. If the DNC has not openly anointed a ticket by mid-August, and holds an open convention, that convention may draw NFL type ratings.

So, it matters to the populace. It matters to the news flow. I think it's early to do more than trade these headlines based on momentum and the flow of capital. Investing this far ahead of real solid polling based on knowledge that we just do not and can't have right now, would in all honesty be akin to gambling. The election in early November likely just got closer than it would have otherwise been.

Very Good Question: Is He Fit to Serve?

Speaker of the House Mike Johnson, a Republican out of Louisiana, asked the question... "If Joe Biden is not fit to run for president, he is not fit to serve as president." It's a statement made by an opposition party leader and one can take it as just that if one prefers, but we really do have to ask that question. Someone has to be Commander in Chief for the next six months. Should it be someone who is cancelling his own bid for re-election due to an overt decline in his abilities? Should this person even have been in that position for the past year plus?

The Week That Was

The market theme for the past week had to be the evolution from the ongoing rotation early in the week into what appeared to be and felt more like a broad market sell-off later in the week. For the week, from an overview, technology was again hit harder than everything else. There was a good reason for that beyond mere rotation. Friday's trade was simply dominated by the news of a global outage that hit all kinds of businesses running Microsoft MSFT software reliant upon CrowdStrike Holdings CRWD for their cybersecurity needs. CrowdStrike had released an update for Windows that contained a defect.

Yes, these are both Sarge names. Microsoft was down 0.74% on Friday. I did not touch that position. CrowdStrike was pummeled for 11.1%. Readers may recall that I had sold CRWD shares at $370 and $354-plus in two tranches the two weeks prior. Well, I bought those shares back at $303-plus. That's all well and good, except now I find myself overweight CRWD at a time that I do not trust the shares. We'll see how this plays out.

CrowdStrike continues to trade lower overnight into Monday morning, despite equity index futures that have been trading higher as the issues tied to that ill-fated update appear to have legs. The stock will likely test its own 200-day simple moving average this morning. A failure at that level would force my serious reconsideration of this allocation of funds. Thankfully, SentinelOne S has been acting well. Zscaler ZS and Palo Alto Networks PANW would be leading candidates to fill that hole in my book should I end up having to make that decision.

Equity Marketplace

Just whoa...

 The S&P 500 gave up 0.71% on Friday to close the week down 1.97%.

- The Nasdaq Composite gave up 0.81% on Friday to close the week down 3.65%. 

- The Nasdaq 100 gave up 0.93% on Friday to close the week down 3.98%. 

- The Russell 2000 gave up 0.63% on Friday to close the week up 1.68%. 

- The S&P Small Cap 600 gave up just 0.02% on Friday to close the week down up 2.22%. 

- The S&P Mid Cap 400 gave up 0.71% on Friday to close the week down 0.18%.

- The Dow Transports gained 0.6% on Friday to close the week up 1.68%. 

- The Philly Semiconductor Index gave up 3.11% on Friday to close the week down 8.8%. 

- The KBW Bank Index gave up 0.15% on Friday to close the week up 3.29%.

Last week, five of the 11 S&P sector SPDR exchange-traded funds gained ground over the five-day period, led by the Energy Select Sector SPDR fund XLE, as three of these funds gained more than 1%. Technology XLK gave up a whopping 5.53%, leading the losers as four of these funds gave up at least 1% over the week. Interestingly, only Friday, as the sell-off broadened, the four defensive sectors took the top four slots in the one-day performance tables. Technology still came in last for good reason.

The Macro Results

The macro-economic results that were released last week were indeed better than expected. At least for the most part. That showed up in an improved outlook for second-quarter gross domestic product growth, which we'll get our first look at this week. The Empire State Manufacturing Survey disappointed modestly for July and continued New York's now eight-month long manufacturing focused losing streak. Interestingly, the Philadelphia Fed Manufacturing survey, which is arguably more important than New York's, not only surprised deep in expansionary territory, but it also extended a six-month winning streak for that district. On Tuesday, June retail sales disappointed at the headline, but impressed at the core, which I guess is a win, on balance. More impressive than retail sales was June industrial production. This item has now put together back-to-back monthly beats as capacity utilization has popped. On a negative note, the Conference Board's Index of Leading Indicators for June printed in a state of month-over-month contraction of flat for a 27th month in the past 28.

GDP Modeling

Last week, the Atlanta Fed revised its GDPNow model for the second quarter up to growth of 2.7% (q/q, seasonally adjusted annual rate) from 2.5% based mostly on the better-than-expected data for retail sales. Coming out of this weekend, for Q2 2024, the New York Fed sees the second quarter growing 2.01%, up from 1.8% last Monday, the St. Louis Fed is at 1.14%, up from 0.97%, and the Cleveland Fed remains at 0.69%. St. Louis has run the most accurate model among the four this year.

Fed Funds Futures

Considering next week's July 31 policy decision, the probability for no change stands at 95%, as the likelihood for a quarter-percentage point reduction made to the target range for the Fed Funds Rate by Sept. 18 is now up to 92% from 88% a week ago. The odds of at least a quarter point rate cut by Nov. 7, which would be after the presidential election, now stands at 98% with 57% chance for 50 basis points worth of rate cuts by then.

I still think the Fed should wait until after the election to adjust policy as that would keep it out of politics, while preserving the concept of central bank independence. That might be important now with so much uncertainty around this election.

Earnings & Valuation 

According to FactSet, for the second quarter, with 14% of companies having already reported, the S&P 500 is expected to sport earnings growth of 9.7% on revenue growth of 4.7%. This is coming off of a first quarter that showed earnings growth of 5.9% on revenue growth of 4.3%. For the full year, projections are for earnings growth of 11%, which implies a strong finish to the year, on revenue growth of 5%. For the second quarter, three sectors are expected to report 15% earnings growth or greater. Those would be communication services (18.5%), health care (16.6%), and technology (16.6%). Staples (down small) , energy (down small), industrials (-3.7%) and materials (-12.7%) are all expected to report year-over-year earnings contraction. The S&P 500 closed out the past week trading at 21.2-times forward looking earnings, down from 21.4-times a week ago. This remains well above both the five-year average (19.3 times) and the ten-year average (17.9 times) for that index.

Fun Fact 

While FactSet shows a second-quarter consensus for S&P 500 earnings growth of 9.7%, four of the "Mag 7" names... Nvidia NVDA, Amazon AMZN, Meta Platforms META and Alphabet GOOGL are expected to post earnings growth of 56.4% in the aggregate. Ex-those four names, the S&P 496 would be expected to post earnings growth of 5.7%.

The Week Ahead 

Party on, dudes. Why? It's the Fed "media blackout" period. No Fed heads out and about flapping their gums for the next week and a half. Earnings really do turn it up a notch though as this will be the first truly busy week of quarterly financial results.

Corporate... Again, there is not a lot on this week's corporate calendar other than earnings. Earnings, though, will be aplenty. As far as headliners, Tuesday morning brings United parcel Service UPS, Spotify SPOT, General Motors GM, Coca Cola KO, Lockheed Martin LMT, and GE Aerospace GE. That afternoon, both Alphabet, and Tesla TSLA will go to the tape. On Wednesday morning, we'll hear from General Dynamics GD, and AT&T T, followed that afternoon by ServiceNow NOW, KLA Corp KLAC, Ford Motor F, and Chipotle Mexican Grill CMG. As the week winds down, on Thursday and Friday, Honeywell HON, RTX RTX, Northrop Grumman NOC, and 3M MMM will all post numbers.

Central Banking... The Fed will be sitting this week out. That's probably a good thing, as the constant drumbeat of Fed speak has really become background noise. What we need is a week and a half of silence, followed by a statement and a Jerome Powell press conference.

Macro... This will not be an insanely busy week for the macro. There will be a few items that we'll have to stay focused on, though. Early in the week, we'll see June data for both existing and new home sales. Later on in the week, June durable goods orders will cross the tape. The focus there will be on core capital goods. On Thursday, we'll also get a preliminary estimate for Q2 GDP from the Bureau of Economic Analysis, followed by June PCE, Core PCE Personal Income and Personal Spending on Friday. In theory, the PCE data should be a big deal as this is what the Fed sees as consumer level inflation when they mention their target, but the fact is that this series rarely surprises.

Economics (All Times Eastern)

No significant domestic macroeconomic data-points scheduled for release.

The Fed (All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: VZ (1.15)

After the Close: CDNS (1.23), CCK (1.59), CLF (-0.01), NXPI (3.20), NUE (2.49)

At the time of publication, Guilfoyle was long NVDA, AMZN, MSFT, CRWD, S, LMT, GE, GD, NOW, NOC equity.