Trump Thoughts and Questions, All Hail the Little Guys, Room for Rotation?

The news traveled around my circles in seconds on Saturday afternoon. "They" just tried to take out Trump! The chain of text messages extended through the family and friends circuit as all sought out the nearest television in an effort to find out what had just happened. By the grace of God, the former president was spared likely due only to the tilt of his head as he spoke to his audience in rural western Pennsylvania. Others among his admirers were less fortunate as there were casualties, including one Corey Comperatore, firefighter who apparently died shielding his loved ones.

As for the health of the former president, he was shot through the ear, and he is a 78-year-old man who was jumped on by four or five Secret Service agents assigned to his team. One of my best friends was a Secret Service agent for many years. He was an intelligence officer in the Marine Corps and served on the Secretary of State's team under both Republican and Democratic Secretaries. These people are professionals. I know my friend. He absolutely lived and breathed the Marine Corps since we were kids, still served in the Reserves while protecting SecStates and returned to active duty after his time in the Secret Service was up.

I have not gotten a chance to ask for his thoughts since the attempted assassination of a former and potentially future U.S. president, but l am sure he is shaking his head. I don't know how it is possible for Secret Service, local and state law enforcement to have missed the roof of the only free-standing building within 150 yards or so from the podium where the former president would be speaking. Seems quite farcical, actually. I really don't think a bunch of ten-year-old kids playing army could have made that error.

For those that have no training in firearms, that short range is literally nothing. It would be virtually impossible for even a rookie marksman with an AR-15 type rifle that he or she had zeroed him or herself to come away with anything other than a headshot, even without a scope. Thank goodness, this deranged individual apparently either had no training or had to rush his shots. That does not excuse those that permitted him to get to that point with a long arm in the first place. When a team, any kind of team, arrives at a place where they will be setting up for a while, all avenues of approach or attack are assessed and guarded. Many of these folks serving in this capacity are like my friend, combat veterans. They know better.

Someone did not do their job. I won't take it any further than that. The Director of the U.S. Secret Service is Kimberly Cheatle, the Secret Service is part of Homeland Security. The Secretary of Homeland Security is Alejandro Mayorkas who has already sat idly by while the border crisis has escalated, creating many problems that need not be created. Is it too much to ask for one of these bureaucrats to raise their hand and say that this is their turf and count on them to face the public and explain? Should they resign? That's not for me to say, but they should have already been visible and seen as in command. Guess that's just too much to ask from this very close to being "derelict in their duty" crew. Always Faithful.

Overnight

U.S. equity index futures and cryptocurrency markets are trading higher overnight as betting probabilities concerning both former President Trump winning back his old job and a Republican sweep of the legislature have greatly increased since Saturday. A Republican sweep would likely usher in a new era of reduced regulation and would be seen as decisively "pro-business."

The Week That Was

The highlight for the past week for equity markets had to be the wicked rotation on Thursday out of the mega-cap tech stocks and into everything else. Those looking for a continuance of said rotation were to be disappointed, but only if they were looking for a further exodus from large tech. Those only interested in seeing small-to mid-cap stocks and the transports continue to find buyers were not disappointed at all. 

What I am saying is that Friday brought with it about as broad a rally as we ever see. Only the VIX and the KBW Bank Index were lower on Friday and that was after a few of the large banks had reported their Q2 earnings and had failed to impress their investors.

Fed Chair Jerome Powell got the party started last week as he delivered his semi-annual testimonies before the Senate Banking Committee and the House Financial Services Committee on Tuesday and Wednesday. Powell's remarks before our legislators reinforced expectations that the central bank is more than likely prepping for a 25-basis point cut to its target range for the Fed Funds Rate as soon as September 18.

Powell's appearances led to the readings for June inflation, which were what gave both equity and debt markets a boost. June CPI printed a bit cooler across the board than expected, which boosted hopes for that rate cut in September. That was followed by June PPI data on Friday that landed a bit warm across the board for anyone's liking.

Markets do not fear producer/wholesale inflation the way they do consumer-level inflation, though, and there was no negative market reaction. Fair warning, however, producer-level inflation often leads consumer-level inflation and year-over-year PPI has increased now for five consecutive months. Remember when I warned you that inflation was likely going to reaccelerate this autumn into winter? I wasn't kidding.

Lastly, the second-quarter earnings season started last week. The season got off to sort of a rough start. Delta Air Lines DAL and ConAgra Brands CAG got beat up on Thursday and then the large banks... Citigroup C, JPMorgan JPM and Wells Fargo WFC ran into a collective buzzsaw on Friday. The rest of the market did rather well.

Equity Marketplace

All hail the little guys.

- The S&P 500 gained 0.87% on Friday to close the week up 0.55%.

- The Nasdaq Composite gained 0.63% on Friday to close the week up 0.25%. 

- The Nasdaq 100 gained 0.59% on Friday to close the week down 0.3%. 

- The Russell 2000 gained 1.09% on Friday to close the week up 6%. 

- The S&P Small Cap 600 gained 0.9% on Friday to close the week up 5.27%. 

- The S&P Mid Cap 400 gained 0.89% on Friday to close the week up 4.31%.  

- The Dow Transports gained 0.6% on Friday to close the week up 1.59%. 

- The Philly Semiconductor Index gained 1.33% on Friday to close the week up 2.1%. 

- The KBW Bank Index gave up 0.25% on Friday to close the week up 4.29%.

Last week, 10 of the 11 S&P sector SPDR ETFs gained ground over the five-day period, while only Communication Services XLC was in the red. 

Interestingly, three of the four top slots in the weekly performance tables were taken by the more "defensive" sectors. The REITs XLRE and the Utilities XLU led the way, up 4.41% and 3.95%, respectively. Six sector SPDRs gained more than 2% for the week.

Room For Rotation? 

The Philadelphia Semiconductor Index is up 38.31% year to date, while the Dow Transports are down 2.36%. The Nasdaq Composite is up 22.56% year to date while the S&P SmallCap 600 is up 2.44%. The (market cap-weighted) S&P 500 is up 17.73% year to date, while the equal-weighted S&P 500 is up 6.7%.

Other Weekend News 

Over the weekend, the Wall Street Journal reported that Alphabet GOOGL was in advanced talks to acquire cybersecurity startup "Wiz" for roughly $23B. Should a deal ultimately be consummated, and this suggested price be close, it would be Alphabet's largest acquisition ever. 

Wiz provides cloud security services with real-time threat detection and response driven by artificial intelligence. A deal such as this could boost Alphabet's Google Cloud business, which remains a distant third place in terms of market share to Amazon's AMZN AWS and Microsoft's MSFT Azure.

China's National Bureau of Statistics released a plethora of economic data on Sunday night (U.S. time). It appears that Q2 GDP growth of 4.7% year over year fell well short of expectations and reflected a deceleration from the first quarter. 

For the month of June, Industrial Production beat expectations, while still reflecting a deceleration from May, while Retail Sales slowed far more than projected, missing consensus view by quite a lot and decelerating quite badly from the prior month.

GDP Modeling 

Last week, the Atlanta Fed revised their GDPNow model for the second quarter up to growth of 2.0% (q/q, SAAR) based on the 0.6% month over month print for May wholesale inventories. Coming out of this weekend, for Q2 2024, the New York Fed sees the second quarter growing 1.8%, up from 1.79% last Monday, the St. Louis Fed is at +0.97%, up from +0.69%, and the Cleveland Fed remains at +0.69%. 

Just an FYI.... St. Louis has run the most accurate model among the four this year.

Fed Funds Futures

Considering the July 31 policy decision, the probability for no change at all has increased to 95%, 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 88% from 74% a week ago. The odds of at least a 25-basis point rate cut by November 7, which would be after the presidential election, now stands at 97% with 60% 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 them out of politics, while preserving the concept of central bank independence. I am starting to believe, however, that I am alone at this point in my opinion.

Earnings & Valuation 

According to FactSet, for the second quarter, with 5% of companies having already reported, the S&P 500 is expected to sport earnings growth of 9.3% on revenue growth of 4.6%. 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 11.2% implying 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, 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 21.4 times forward-looking earnings, up from 21.2 times a week ago. 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 

The week will start off rather slow, then the week heats up, mostly due to earnings. There will be busier earnings weeks to our direct front, but this will be the first full week of earnings for the season.

Corporate

There is not a lot on this week's corporate calendar other than earnings. Goldman Sachs GS bats lead-off on Monday morning, followed by the Bank of America BAC. Morgan Stanley MS, UnitedHealth Group UNH on Tuesday morning. 

Johnson & Johnson JNJ headlines the Wednesday docket with United Airlines UAL reporting that afternoon. Thursday will be the busiest earnings day of the week as Abbott Labs ABT, Alaska Air ALK, Cintas CTAS, Domino's Pizza DPZ and Netflix NFLX all report. 

Finally, on Friday morning, American Express AXP, and the two oil services giants, Halliburton HAL and Schlumberger SLB, will close out the week.

The Fed

The Fed will be out in a little bit of force this week. Fed Chair Jerome Powell will speak on an otherwise slow day later on today, followed by San Francisco Fed President Mary Daly after the closing bell. Daly is a voting member of the FOMC this year. 

Fed Gov. Adriana Kugler will speak tomorrow (Tuesday). On Wednesday, Richmond Fed Pres. Tom Barkin and Fed Gov. Christopher Waller will speak ahead of the release of the Beige Book that afternoon. 

Then there are already at least five public appearances set for this Thursday and Friday by a number of Fed heads with that number likely to grow.

Macro

The headline event for this week will be this Tuesday's June Retail Sales release by the Census Bureau. Almost as important will be June Industrial Production, released by the Fed on Wednesday. 

Away from those two events, the New York and Philadelphia Feds will release their regional manufacturing surveys for July, and the Conference Board releases their index of leading indicators this Thursday. For those who mind-numbingly continue to claim that the economy has been strong these past few years, this item, a diffusion index of 10 leading economic indicators can boast exactly one month of growth over the past 26. Fact. 

Remember what I told you about GDP vs. GDI and significantly overstated job creation. Our children have not been lying to us since the pandemic. It is and it has been rough out there.

Economics (All Times Eastern)

08:30 - Empire State Manufacturing Index (July): Expecting -5.7, Last -6.

The Fed (All Times Eastern)

12:30 - Speaker: Federal Reserve Chair Jerome Powell.

16:35 - Speaker: San Francisco Fed Pres. Mary Daly.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: BLK (9.96), GS (8.40)

At the time of publication, Guolfoyle was long WFC, AMZN and MSFT equity.