VIDEO: Upcoming Economic Reports Can Impact These Holdings

In today’s Daily Rundown video, Chris Versace discusses the midway point of the current quarter, touching on the market's mood following a volatile week and expectations for upcoming economic data reports.

"It is possible that the market volatility we saw last week continues this week," he projected. "If the July core inflation data is warmer, potentially hotter, than the market expects it will be, it's going to call into question the market's expectation for a 50 basis point rate cut at the Fed's September meeting."

He also explained what he's looking for in terms of TheStreet Pro Portfolio holdings.

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Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here. And it's Monday, August 12. As crazy as it may sound, we're almost at the halfway point for the current quarter. And while many folks are squeezing in that last bit of summer vacation, whether it's this week or next week, we are kicking off a fresh week in the market. But I'm also pulling double duty today, not only managing the portfolio but also filling in for Doug Kass at the Diary. So I would suggest march on over. Take a look. The Diary tends to be a free-wheeling, spirited exchange of things that are catching the person's eye who's running it. And in this case, that's me today. But there's also some great conversation below in the comments section, so please be sure to check that out.

Now, let's get back to our thoughts about the week ahead as we share our game plan and what's on our radar screen for the week. So coming off of last week's volatile week, we've got another jam packed set of days ahead of us filled with inflation data and other economic reports. But we're also going to see a shift in the current earnings season, one that tilts heavily this week and next week towards retailers.

Now, what's the mood starting off this week? Because last week, as you know, volatile. The volatility index, or the VIX, early this morning was inching higher, keeping it at elevated levels. And yeah, while off of last week's sky high print, it's still, as I said, elevated compared to levels we've seen over the last few months. Also, too, the CNN Fear and Greed Index is still hovering in extreme fear. So we know the market mood remains a little nervous, cautious, arguably, ahead of the coming inflation data that we'll get Tuesday and Wednesday.

But what is different about this week compared to last week is the market, meaning the S&P 500, the NASDAQ Composite. They are not either near or in oversold levels. So we put all this together, and we think about the data that we might get this week. It is possible that the market volatility we saw last week continues this week.

Now, why do I say that? Well, we are going to get the July CPI and CPI reports, and both are expected to show a modest uptick in inflation compared to June. That's really at the core level. And it can either be on the month over month or the year over year levels. Some folks out there are saying, don't worry, the market can swallow an uptick in these reports, and we can still see the Fed on path for multiple rate cuts this year.

Now, we have to remember that we did see the Atlanta Fed GDP now model for the current quarter be revised higher to 2.9%. That doesn't say that the economy is rolling over. We've talked about this. But here's the thing. If the July core inflation data is hotter than forecasted-- and remember, there were seeds for that in the July services PMI report. But if the July core inflation data is warmer, potentially hotter than the market expects it will be, it's going to call into question the market's expectation for a 50 basis point rate cut at the Fed's September meeting. And we can see that. That's reflected in the CME FedWatch tool. I would encourage you to take a look. It's something that I will be paying close attention to.

So here's the thing. If the July core inflation data comes in hotter than expected, it is a reason to think that last week's market volatility will continue this week. But we also have some other pieces of July data. We've got July retail sales, industrial production, housing starts. And all of those are going to be insightful for the areas of the economy that they talk about.

But we also will want to see what these incremental pieces of inflation data and other economic data say about GDP expectations for the current quarter. Remember, just a week or two ago, after we got the July employment report, the July manufacturing PMI report, folks were getting very concerned about the speed of the economy, questioning whether or not we might actually get a hard landing. This, of course, goosed expectations for Fed rate cuts.

But we're back in this managing and looking at the data. So what we're going to want to pay attention to is, relative to that 2.9% Atlanta Fed GDP rolling forecast, what do the updates for July retail sales, industrial production, and housing starts bring for the pace of the economy? Now, these data points don't all come on the same day. They're going to be spread throughout the week, which means that the market is likely going to be trading based on the last data point that it heard. That means it's another reason to think that market volatility could return this week as the market tries to parse and puzzle through the true speed of the economy.

But, again, here's the thing. The quarter is three months, as we know, and we're only now really starting to get more data for the month of July. We have more data to come for the month of July, but we're also going to get data for August, data September, all before the Fed exits its next policy meeting. And what I'm getting at here is there's going to be a lot of conversation about the speed of the economy. We can't base it on any one month because the quarter is, as I said, three months long. This is going to be, as a result, an evolving story that we will have to continue to follow. And based on the data, the sum of which we will use to base our thinking about the true speed of the economy in the current quarter compared to the year ago quarter compared to the June quarter, that's what's going to matter most.

But we will also be mining this week's data for nuggets about the portfolio. Retail sales, for example, what does it tell us about the consumer? More importantly, what does it tell us about some of the positions we have in the portfolio, whether it's for Amazon, PepsiCo, and, of course, context for Costco's July retail sales? So that's going to be a big report for us. It always is. And of course, we will have comments out to you.

Industrial production-- here, we're going to get another look on the manufacturing economy during the month of July. This will be important for a couple of reasons. First of all, we know that the services economy continues to carry the overall economy, but the July manufacturing PMI reports said the manufacturing part of the economy was contracting. The July industrial production report will give us another look at that. So we'll have a better sense as to whether or not it really is contracting and, if so, to what degree?

And then, finally, we have the July housing starts report. This is one you know that we're going to dig into, given our positions for Builders FirstSource, United , Rentals and Vulcan Materials and, indirectly, Waste Management. So we'll be looking at really the pace of single family housing starts, both on a seasonally adjusted but really on a non-seasonally adjusted basis. We'll also be paying some attention to multifamily. And I say that because last week, when Builders FirstSource reported, it did say that multifamily had been a little weaker than expected. We'll be looking to see if there is a turnaround in that part of the business, or that part of the housing construction industry, I should say, as we move into the seasonally stronger summer months for overall construction activity.

Now, let's talk about earnings that we have coming into this week. In Friday's roundup, I talked about how roughly 90% of the S&P 500 had reported, and now we're going to see a tilt towards retailers. Now, why is this important? Well, a couple of reasons. First and foremost, the narrative that we've been hearing about consumers, increasingly so from various reports, the signals that we shared over the weekend, but even from CPG companies that already have reported is that the consumer is becoming increasingly selective.

This runs the risk of retailers as they report of giving kind of tepid guidance for the back half of the year, which is important because it includes the all important holiday shopping season. Where I'm going with this is we've already started to see second half expectations for the S&P 500 to be revised lower compared to what they were previously. It's hovering around 8% compared to the first half of the year. That's down from north of 11%. The concern here is that, as more retailers report, we could see further downward revisions in EPS expectations for the second half of the year compared to the first half.

If that happens, it could raise concerns about the current market multiple. Exiting last week, the S&P 500 was trading around 22 times. Where did it peak? Just a little over 23 times a few weeks ago. Now-- so if to the extent we see more negative revisions for S&P 500 EPS expectations for the second half of the year, I continue to think folks will revisit that market multiple. And yes, it's another reason why the market could remain volatile this week, next week, as we move through and get through the Labor Day holiday.

So we're going to continue to be cautious with the portfolio. We made a number of moves last week. We will continue to be opportunistic in the near term. If that means we see the opportunity to potentially raise a little bit of cash, ring the register, that is something that we will do. But before we get out of here, let's talk about the earnings that are on tap for this week. And as I mentioned, it's going to start to be a little retail heavy.

With that, we have Home Depot on Tuesday. We will be paying attention to this for the repair remodel market primarily. But I do see the risk that there could be a softer print out of Home Depot. Why do I say this? Well, let's get back to the commentary and narrative about the consumer being more selective. Also, too, let's remember that coming out of the pandemic, there were a number, a proverbial ton, of projects that consumers undertook. So it is possible that we could see a weak print out of Home Depot.

That's Tuesday. Thursday is another big day for retail land. I say this because we're going to have Walmart, Dillard's, and Ross stores. Parsing these together will give us a real bead on the consumer. Are they schlepping to shop? Are they searching out discounts? And if so, what does that mean for other retailers? We also want to see what Walmart has to say about grocery and if it's continuing to win market share there compared to others. Remember, Walmart, among many other things, it is the nation's largest grocery chain.

We also have some other earnings outside of retail land, most notably Cisco. And there are some rumblings that we could see another round of headcount reductions there. But we'll be paying close attention to what it says about the outlook for broadband growth as well as overall network congestion. Remember, that's kind of a key issue for us as it relates to Marvell.

And our thinking is that, as AI is adopted, we're going to see an explosion in the amount of data being created and consumed, pressuring network capacity levels, fostering another round of upgrade spending that should bode well for Marvell. We'll be looking for confirmation in that when Cisco reports. But we'll also be paying close attention to what Cisco has to say about cybersecurity, especially as we get closer to the 2024 presidential election season.

And then, finally, we do have one portfolio company reporting this week. That is Applied Materials. That will be after Thursday's close. We'll be listening there for comments about the rebound in the PC market and the smartphone market that's driving demand for memory. What does that mean for semiconductor capital, equipment capacity for that? But, also, the overall chip market and, of course, AI, how is that factoring into capital spending plans?

Now, Applied Materials has been one of those positions that we've tried to build up over time. Unfortunately, it is one that has kind of run ahead of us. Perhaps we get that opportunity. This will be one that we'll be watching closely. So with that, I would say this-- given not only that earnings report later this week, but given all the stuff that's happening this week, please be sure-- check your emails, your alerts. We want to make sure you are getting our latest thoughts. And if we make any trades with the portfolio, we want you right there with us.

That's our plan for the week. Thanks for tuning in. And remember, be sure to check the Diary today, where I'll be sitting in for Doug Kass. Remember, we have office hours tomorrow, Tuesday. It's going to be a busy week, but we'll be right there with you. Thanks for watching.