Performance for Week Ending 7.14.2023:
The Dow Jones Industrial Average (Dow) finished up 2.29%, the Standard & Poor’s 500 Index (S&P 500) added 2.42% and the Nasdaq Composite Index (NASDAQ) tacked on 3.32%. Sector breadth was positive with all 11 of the S&P sector groups closing the week higher. The Communication Services (+3.36%) sector led on the upside followed by the Consumer Discretionary (+3.31%) and Technology (+2.79%) sectors.
||Closing Price 7/14/2023
||Percentage Change for Week Ending 7/14/2023
||Year-to-Date Percentage Change Through 7/14/2023
*See below for Index Definitions
MARKET OBSERVATIONS: 7/10/23 – 7/14/23
Stocks finished the week solidly higher with the Nasdaq Composite leading the charge and posting its best weekly gain since late-March. Driving the gains were signs that inflation continues to cool, which in turn, lessened the odds of a more aggressive rate tightening path by the Federal Reserve. The Labor Department reported that the consumer price index (CPI) rose 3% on a year-over-year basis, the smallest advance in more than two years. Excluding food and energy, the core CPI — which economists view as the better indicator of underlying inflation — advanced 4.8%, also the lowest since 2021. Both measures climbed 0.2% month-over-month, less than economists expected. The producer price index (PPI) rose 0.1% on a year-over-year basis, while the core rate (ex food and energy) advanced by 2.4% year-over-year. Both measures climbed 0.1% month-over-month, less than economists expected. While the reports are likely to keep the Fed on track for another rate hike later this month, the odds of a follow-on rate hike have retreated. According to the CME Fed Watch tool the probability of a 25bps increase at the conclusion of the July FOMC meeting stands at 96.7%, whereas the odds are pegged at around 13.5% for the September meeting (down from 24% a week ago) and around 26.4% for November (down from 34.5% a week ago).
Sentiment Improves: Also easing concerns of a near-term recession was a jump in consumer sentiment. The University of Michigan's consumer sentiment index jumped 8.2 points in July to 72.6, its largest month-over-month gain since 2006 and the highest level since September 2021. Sentiment was boosted by easing inflationary pressure, low levels of layoffs, and the recent rise in stock prices. Consumers’ assessment of their household finances relative to last year improved and is the best seen this year. Expectations about household finances next year jumped and was likely attributed to the deceleration in realized Inflation. Buying plans generally improved, including for major household items and vehicles. The bulk of consumers still don’t believe this is a good time to buy a home, which is not surprising because of affordability issues.
Q2 Earnings Season: Second quarter earnings season kicked off late last week with reports from a handful of mega cap financial institutions. JPMorgan, Wells-Fargo, and Blackrock all reported stronger than expected. Meanwhile Dow-component UnitedHealth also exceeded analysts’ forecasts and raised the lower end of its full-year earnings guidance. The bar has been set very low heading into the start of earnings season, with analysts forecasting a roughly 8% year-over-year drop in S&P 500 earnings, according to Bloomberg. That would mark the worst earnings season since the second quarter of 2020, when S&P 500 profits dropped by over 30%. While it’s too early to draw any conclusions, second quarter results are off to a much stronger than expected start. Through Friday, 28 members of the S&P have reported with just over 81% surprising to the upside. Aggregate earnings for this group are up +12.75%, well ahead of current expectations for an 8% loss when all is said and done. Earnings season will shift into high gear over the next two weeks with 60 members of the S&P scheduled to report this week and 162 in the following week.
Beige Book: Better-than-expected commentary from the Fed's June 'Beige Book' report on regional economic activity also added to bets that the U.S. will be able to avoid recession over the second half of the year. The report, which draws from anecdotal information collected by the 12 regional Fed banks and is typically used as a playbook for upcoming Fed meetings.
The report said "overall economic activity increased slightly since late May. Employment increased modestly during the period, with most districts experiencing some job growth. Labor demand remained healthy, though some contacts reported that hiring was getting more targeted and selective. Employers continued to have difficulty finding workers, particularly in health care, transportation, and hospitality, and for high-skilled positions in general. However, many Districts reported that labor availability had improved and that some employers were having an easier time hiring than they were having previously. Employers also reported that the unusually high turnover rates in recent years appear to be returning to pre-pandemic norms. Wages continued to rise, but more moderately. Contacts in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels."
Reports on consumer spending were mixed; growth was generally observed in consumer services, but some retailers noted shifts away from discretionary spending. Tourism and travel activity was robust, and hospitality contacts expected a busy summer season. Manufacturing activity edged up in half of the districts and declined in the other half. Banking conditions were mostly subdued, as lending activity continued to soften. Despite higher mortgage rates, demand for residential real estate remained steady, although sales were constrained by low inventories. Construction for both residential and commercial units was slightly lower on balance. Prices increased at a modest pace overall, and several Districts noted some slowing in the pace of increase. Consumer prices generally increased, though reports differed in the extent to which firms were able to pass along input cost increases.
Fed Speak Still Leaning Hawkish: San Francisco Fed President Mary Daly said, “We’re likely to need a couple more rate hikes over the course of this year to really bring inflation back into a path that’s along a sustainable 2% path.” Cleveland Fed President Loretta Mester said, “In order to ensure that inflation is on a sustainable and timely path back to 2%, my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more information on how the economy is evolving.” Richmond Fed President Tom Barkin told a Maryland business group that he still felt inflation had "been stubbornly persistent." "No matter how you cut it, inflation has been too high," he said, adding that he agreed that overall demand was beginning to slow, but he wanted to be "convinced" by incoming data that it would translate into lower inflation. In other Fed news, St. Louis Fed President James Bullard, one of the more hawkish members of the Fed who has called for aggressive interest-rate hikes to fight the recent inflation surge, resigned after 15 years in the position to become dean of the business school at Purdue University.
The Week Ahead: With Fed officials entering their blackout period ahead of next week’s FOMC meeting, the data and earnings calendar will take center stage. The focal point of the economic calendar will be Tuesday’s release of June retail sales. The report will be watched closely as a gauge to measure the resilience of the US consumer. According to the Bloomberg consensus, economists expect total retail sales to edge higher to +0.5% month-over-month from +0.3% in May. Other data releases of interest include the July Empire Manufacturing Index and June industrial production on Monday, June housing starts on Wednesday and June existing home sales and the Index of Leading Economic Indicators for June on Thursday. The earnings calendar will pick up this week with 60 members of the S&P 500 expected to release results. Amongst this group are five members of the Dow Jones Industrial Average.
— By Michael Schwager, Chief Market Strategist, Managing Director
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
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