After flying higher through June and July, the major averages last week lost a little altitude for the second consecutive week. The averages hovered near breakeven for most of the week and, in the end, the net losses were relatively small, but the flight path is suggesting that the market may have reached a ceiling and stalled in August. For the week, the S&P 500 Index (SPX) slipped a mere 0.31%. The NASDAQ Composite Index (COMP) flew a little steeper vector on its descent, losing nearly 2% last week. That marked the first time this year that COMP had back-to-back weekly losses.
The hugely anticipated inflation data late in the week inspired a short-term takeoff and landing. When the Consumer Price Index numbers were reported in line with expectations, investors cheered the absence of bad news and stock indices rocketed higher. But there was no follow-through buying after the initial surge, and the averages gave back much of the opening gains by the end of the session. The Friday Producer Price Index data was a tick or two worse than expected. Stocks opened lower on the news but, again, there was no follow-through, and the averages ended the day roughly where they opened.
The major averages were able to enjoy relative stability in their flight through the week despite turbulence on the sector level. Technology stocks were clearly a drag on COMP with the S&P Technology sector declining 2.5%. Several of the mega-cap tech stocks that led the market through June and July have encountered some wind shear in recent weeks. And the Financials sector hit an air pocket early last week after Moody’s downgraded 10 big banks, citing concerns over rising funding costs and risks in commercial real estate.
Two sectors came through the week with flying colors. The Healthcare sector got some lift thanks to positive earnings announcements from a couple of the larger component companies in the group. Healthcare was the second-best U.S. equity sector last week with a gain of nearly 2.5%. The best of them all last week (+3.4%) and over the past five weeks (+11.3%) was the Energy sector. Energy was among the poorest performing sectors through the first half of the year, weighed down by weakness in crude oil prices. Recent oil market strength has been a tailwind for energy stocks. Crude, which traded below $70 per barrel several times from March through June, ended last week above $83, up 12% in the past month.
In recent months, the stock market has clearly been getting some lift from growing investor optimism over the increasing possibility for a soft landing. As the U.S. Federal Reserve (Fed) board has been banking for its final approach, investors have been increasingly banking on the Fed being able to stick the landing. The rate of inflation seems to be subsiding; employment numbers show no cause for concern; and corporate earnings, while a bit lower than year-ago levels, are still holding up better than had been expected. But flying in the face of that fundamental hope is a bogey of a technical nature: Stock market valuations got stretched out to relatively rich valuations through June and July. Several broad indices and sectors had climbed into technically overbought conditions. At a minimum, some period of consolidation was due.
A peek at the instruments indicates that the speculative enthusiasm was getting a little out of hand. July saw a resurgence of those zany meme stocks. There were several examples of sudden price spikes with gains of 100% and more in the stocks of bankrupt or near-bankrupt companies. Likewise, there have been big recovery rallies in many of the formerly high-flying “innovation” company stocks that cratered so spectacularly last year. And the American Association of Individual Investors recently reported the highest spread of bullishness over bearishness in more than 18 months. That’s a fairly reliable contrary indicator when the readings reach extreme levels. We can’t be too surprised that the stock market seems to have entered a consolidation period.
The phrase “touch and go” as a noun refers to a practice landing maneuver where the plane touches the ground and then immediately takes off again. That is the essence of the Fed’s mission. They want to slow the economy enough to cool inflation and then have the economy immediately strengthen again with inflation under control. But that same phrase, used as an adjective, describes a situation that is very uncertain- even critical. And, unfortunately, that describes the Fed’s current predicament.
In any modern airplane, the pilot can make adjustments to the rudder, ailerons, flaps and engine thrust to alter the plane’s forward course. In contrast, the plane the Fed is trying to land doesn’t even have a joystick. Through its series of interest rate-hikes, the Fed has clipped the wings of inflation with barely a noticeable impact on GDP and employment. So far, so good. But the economy is now on a glide-path that the Fed can only hope will achieve a soft landing.
As I wrote a couple weeks ago in my article Don’t Bet the Farm, “Given the extreme bullishness, the already extended valuations, the relatively high interest rates (that make higher valuation less likely); and with the Fed’s clearly “higher for longer” policy, investors might be well advised to harvest some gains.”
SPX closed Friday at 4464, its lowest level in a month, but still well within the upper end of its range for the year. So far, the index has given back a mere 130 points or so of its 800-point rally from its March low to its July rebound high. A key technical level for SPX is its 50-day moving average, which currently stands at 4440ish. Sustained trading below that level would introduce a new downside target in the 4330–4350 area. If instead SPX can hold in this area and recover some of the recent losses, then climbing back above last Thursday’s high near 4530 would be a very encouraging development.
Even the economic report calendar seems to be in the summer doldrums. It’s unusual to have reports on only three days of a five-day week. Thankfully, the Fed minutes release on Wednesday afternoon could provide some excitement. And Thursday morning brings the always-exciting Initial Unemployment Claims report. Earnings season is winding down with relatively few companies yet to report. The headline names on the earnings calendar this week are several of the major retailers.
|Economic Calendar (8/14/23 – 8/18/23)||Previous||Consensus|
|Monday 8/14/2023||No Reports Scheduled|
|Tuesday 8/15/2023||Retail Sales, July, M/M||+0.2%||+0.4%|
|Retail Sales ex-Vehicles & Gas, July, M/M||+0.2%||+0.4%|
|Empire State Manufacturing Index, August||1.1||-0.4|
|Import Prices, July, M/M||-0.2%||+0.2%|
|Export Prices, July, M/M||-0.9%||+0.1%|
|Housing Market Index, August||56||56|
|Wednesday 8/16/2023||Housing Starts, July, SAAR||1.434mm||1.455mm|
|Building Permits, July, SAAR||1.440mm||1.464mm|
|Industrial Production, July, M/M||-0.5%||+0.3%|
|FOMC Meeting Minutes|
|Thursday 8/17/2023||Initial Jobless Claims||248K||240K|
|Philadelphia Fed Manufacturing Index, August||-13.5||-10.0|
|Leading Indicators, July, M/M||-0.7%||-0.4%|
|Friday 8/18/2023||No Reports Scheduled|
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market