Big Week Ahead, What to Watch, Hot or Not? Rate-Cut Hopes, S&P Valuation
Last week gave traders praying for a rate cut in the near-term future more hope than they had. That, and a bad week for the economy, gave those traders the fix they desperately needed.
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You're here. You've made it. Monday, sweet Monday, at last.
Maybe I'm crazy, maybe I'm not, but sometimes nothing makes me appreciate a five-day work week more than a calendar that seems endlessly dotted with federal holidays. I want to work five full days, take two days off and do it all over again repetitively.
You see, I'm old enough to have been informed by Social Security what my options are going forward. Retirement? Me? Gee whiz, gang... I'm just getting started. Maybe I just love the hard-charging, fire-eating, regimented lifestyle of the trader/investor/rock and roll star? Maybe I just love having to live by a code of discipline that has served me well over time.
Whatever it is, welcome back to you all, and welcome back dear Monday morning. Maybe I don't actually love Monday mornings. Maybe, just maybe, I know myself well enough to know that I still need Monday mornings, and darn... I hope they need me back. Always Faithful.
The (Short) Week That Was
What kind of week was it that just passed? Not truly a short week. Still cranked it up on Monday morning. Still shut it down on Friday evening. In between, we worked two and a half days, which is kind of odd, slept in one morning, and then re-charged our batteries for a one-day run. Would be a whole lot easier just working four days with either a Monday or a Friday off, though I think I speak for all profit/loss types and commission-based folks when I say that at least now we can work two months straight without interruption. That is until our better halves start asking us to please take time off. Let's not think about that right now.
Both the S&P 500 and Nasdaq Composite, as well as the Nasdaq 100 closed out the week at all-time high closing levels, seemingly setting new records on a near-daily basis. The semiconductors had an awesome week as well but could not close at a record as Nvidia NVDA, though still up 1.85% on the week, surrendered industry-wide market leadership to the likes of On Semiconductor ON, Broadcom AVGO, and Advanced Micro Devices AMD, all of which gained roughly 6% or 7% over the three and a half days.
Small to mid-cap focused indexes closed down for the week, as the re-rotation or un-rotation was back on. Mega-cap stocks were back on top, led by Tesla TSLA as that stock gained a jaw-dropping 27.11% for the week ahead of and coming out of the firm's better-than-expected quarterly report on vehicles delivered.
Away from Tesla, Fed Chair Jerome Powell appeared in Portugal last Tuesday and without really saying anything concrete, referred to the "deflationary trend" of recent data.
What we did was give traders praying for a short-term rate cut in the near-term future more hope than they had. On top of that, the economy had a rather awful week, and that was really all those traders, desperate for a fix, needed.
Equity Marketplace
Hot or not? Well, it's complicated.
-- The S&P 500 gained 0.54% on Friday to close the week up 1.95%.
-- The Nasdaq Composite gained 0.9% on Friday to close the week up 3.5%.
-- The Nasdaq 100 gained 1.02% on Friday to close the week up 3.6%.
-- The Russell 2000 gave up 0.49% on Friday to close the week down 1.02%.
-- The S&P Small Cap 600 gave up 0.73% on Friday to close the week down 1.09%.
-- The S&P Mid Cap 400 gave up 0.76% on Friday to close the week down 1.17%.
-- The Dow Transports gave up 0.77% on Friday to close the week down 0.88%.
-- The Philly Semiconductor Index gained 0.08% on Friday to close the week up 3.36%.
-- The KBW Bank Index gave up 1.4% on Friday to close the week down 0.19%.
Last week, six of the 11 S&P sector SPDR ETFs gained ground over the three-and-a-half-day period, while five of those funds closed the week in the red.
Discretionaries XLY led the way at +3.77% by virtue of Tesla's performance. Technology XLK and Communication Services XLC both had nice weeks at +2.94% and +2.45%, respectively.
Energy XLE finished the week in last place at -1.05% as cyclicals took three of the bottom four rungs on the weekly performance tables, thanks to the weaker macro.
The Macro
On Monday, the ISM Manufacturing Index for June printed in a surprisingly weakened state. The headline print landed at 48.5, well below the 49.2 that had been the consensus view. This was, for this survey, the 19th month spent in contraction in the past 20. New Orders and Backlog of Orders, the lifeblood of any manufacturing-based survey, continued their lengthy collapse. Prices, by the way, still expanded.
Additionally, Construction Spending for May hit the tape at -0.1% m/m, which was well below projections for +0.3%. This was the fourth month in five that construction spending failed to show any growth. By Wednesday, May Factory Orders printed at -0.5% m/m, down from April's +0.4%, which was revised downward from +0.7%. The expectations had been for something like +0.2% on April's original +0.7% print, making this data-point much. much worse than even it appears.
Then, we get to the June edition of the ISM Non-Manufacturing Index (or Services PMI). This one was a real shock as economists can no longer point to services as the strength of the U.S. economy. The 48.8 print at the headline fell well short of what economists had projected and showed that even the services side of the U.S. economy had been in contraction for most of the past quarter. New Orders and Backlog of Orders simply fell off of a cliff. Employment continued to erode (five consecutive months in contraction), as well. Of course, Prices hit the tape in expansion. Then again, what did you expect?
Speaking of Employment...
For the month of June, the BLS released its Household and Establishment Surveys on Friday. The Establishment survey showed non-farm payrolls growth of 206K, with downward revisions of 54K to May and of 57K to April for net job creation of 95K positions. This was well below the 183K jobs that had been the consensus coming in. What I found truly frightening was that government hires totaled 70K for the month, which is well above recent norms. That comes to almost 74% of the net growth in non-farm payrolls for June.
The Household survey showed 116K more employed persons in June than in May, which was a nice increase from May as for that month this survey showed a decrease of 408K employed persons. That's still 292K jobs lost over May and June, but don't tell the media. They don't want to know.
The Household survey also showed an increase of 162K unemployed persons, while 87K persons did return to the labor force. This pushed the Participation Rate up from 62.5% to 62.6%, while the Employment to Population Rate held firm at 60.1%. The Unemployment Rate crept up from 4% to 4.1%, which while historically low, is an increase of 700 basis points from the year ago comparison. Shockingly, unemployment increased sharply for female adults, African Americans, Asians, high-school graduates with some college and college graduates. The underemployment rate held firm at 7.4%.
Wage growth slowed to a y/y increase of 3.9% from 4.1%, and on a m/m basis from growth of 0.4% to 0.3%. This deceleration in wage growth was as expected. The average full-time workweek held firm at 34.3 hours which is still at the low end of the modern range.
GDP Modeling
By week's end, under the weight of mounting disappointing macroeconomic results, The Atlanta Fed was forced to revise their real-time GDPNow model for the second quarter to growth of 1.5% (q/q, SAAR) down from 3.3% just a couple of weeks back. The Atlanta Fed's model had been an upside outlier basically all quarter long and the New York, St. Louis and Cleveland Feds' models had all been running much lower.
Coming out of the weekend, for Q2 2024, the New York Fed sees the second quarter growing 1.79%, down from 1.93% last Monday, the St. Louis Fed is at +0.68%, down from +0.76%, and the Cleveland Fed is still at +0.69%. St. Louis has run the most accurate model among the four of late.
Fed Funds Futures
Concerning the July 31 decision, the probability for no change in policy at all has dropped to 93% this morning from 95% on Friday, as the likelihood for a 25-basis point reduction made to the target range for the Fed Funds Rate by September 18 is now up to 74% from 72%. The odds of at least a 25-basis point rate cut by November 7, which would be after the presidential election, now stands at 84% with 34% chance for 50 basis points worth of rate cuts by then.
Regular readers know that I think the Fed should wait until after the election to adjust policy as that would keep them out of politics. This excludes having to respond to or prevent an economic crisis from worsening or even occurring. While the data are soft, the U.S. economy does not appear to be headed for an imminent crisis. Of course, with all of the chaos circling around the current administration's leadership specifically, and that side of the electoral aisle generally, I have no idea how the voting members of the FOMC perceive these events.
Liquidation
While Americans were stuffing their faces with hot dogs and watching fireworks last week, Bitcoin did its impression of a pea rolling off of a table. The best known of all cryptocurrencies is trading in the $57,000 area this morning after having traded as high as $63,700 last Monday and below $54,000 early on Friday.
The selloff appeared to be related to long-bankrupt crypto exchange Mt. Gox announced that it would start repaying creditors in July and that those payments would be made in Bitcoin and Bitcoin Cash. On Thursday, reports circulated that more than 47,000 bitcoins worth more than $2.6 billion were transferred out of storage into different wallets. Additionally, the U.S. and German governments were said to be selling bitcoins to crypto exchanges in order to dispose of seized assets acquired through enforcement actions taken against illegal activity.
Earnings & Valuation
According to FactSet, 67 S&P 500 companies have issued negative EPS guidance, while 44 S&P 500 companies have issued positive guidance. For the second quarter, the S&P 500 is expected to sport earnings growth of 8.8% on revenue growth of 4.6%. This is coming off 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 11.2% implying a strong finish to 2024, on revenue growth of 5%.
For the second quarter, sectors sporting 15% earnings growth or more are expected to be Communication Services, Health Care, and Technology. Staples, Industrials and Materials 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. This remains well above both the five-year average (19.3 times) and the 10-year average (17.9 times) for that index.
The Week Ahead
Big week ahead, gang. Not only does the macro heat up with June CPI and June PPI on the docket, but by Friday, the big banks will start going to the tape with their numbers in what is considered to be the unofficial kickoff of Q2 earnings season.
Corporate: This is not going to be a particularly busy week for earnings, but late this week, the quality of the names reporting will notably improve as earnings season gets underway. On Thursday, Delta Air Lines DAL and PepsiCo PEP will both report before the open. Then on Friday morning, Citigroup C, JP Morgan JPM and Wells Fargo WFC will all post their performance.
The Fed: The Fed won't exactly be out in force this week. That said, news will be made. Fed Chair Jerome Powell will testify before the Senate Banking Committee on Tuesday and before the House Financial Services Committee on Wednesday. Though not part of the Fed, Treasury Secretary Janet Yellen will testify before the House Financial Services Committee on Tuesday.
Macro: The headline event for this week will be this Thursday's BLS release of CPI data for June. This one is sure to leave a mark on our marketplace. Outside of that, June PPI hits the tape on Friday and the U.S. Treasury Department will go to market with $39B worth of new 10-Year Notes on Wednesday.
Economics (All Times Eastern)
15:00 - Consumer Credit (May): Last $6.4B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: GBX (1.13)
At the time of publication, Guilfoyle was long NVDA, AMD and WFC.
