Source: Piper Sandler, Bloomberg, Newday Impact
The S&P ended the week up 1.94% and is now 6.34% off its June 16th lows. It was another week of growth outperformance with pure growth companies outperforming pure value by nearly 5%, and that is with yields climbing significantly. The 10-Year Treasury yield climbed 30bps, with 9bps of that coming on Friday after payrolls beat expectations, coming in at 372k (vs 265k consensus). From a Fed perspective, I think the payroll report will do nothing to change Fed Chair Powell’s hawkish positioning. As long as the labor market remains strong, the Fed will have plenty of data to continue to aggressively bring down inflation. I would also highlight that I will be focusing on the month-over-month employment number which I think will be most important to watch when it comes to inflation. My sources suggest the Fed is targeting consistent 0.2%-0.3% m/m core inflation prints before they take their foot off the gas. Assuming I am correct, I think the market implication is we still have volatility and potential for more downside as long as the Fed remains hawkish. I do not want to sound like “a broken record” (showing my age) but market returns for the remainder of the year I believe will be driven by company earnings. Investors and the markets will likely reward the companies that meet or beat consensus expectations.
DETAILS
As shown in the chart above. Markets had a strong week after the 4th of July holiday although trading on light volume during peak summer vacation time likely tamped down big moves. The market has quietly drifted up 5% in the last three weeks which has been among the longest uninterrupted rallies of 2022 so far. I still have some reticence as to whether THE market bottom is in yet. However, given the persistence of selling and the scale of multiple compression there seems to be an improving risk/reward for stocks given historical precedents.
The most recent payrolls report may cast some doubt on those fearing a vicious slowdown in employment data. On the jobs front, at least, there appears to be a lot of strength. Payrolls grew by 372,000 vs consensus which was expecting only 250,000. The headline unemployment rate remained at 3.6%. Some deceleration in key economic indicators had some pundits suggesting that we could be currently in a recession or experiencing stagflation. I have been advocating for some time, this seems less likely given the persistent strength in the labor market. Average hourly earnings have also increased and are up 5.1% from a year ago. So, for the time being, wage pressures may remain on the positive side. We do see some leading indicators suggesting that labor markets should begin cooling as global growth slows.
SCOTSMAN’S OUTLOOK
- The War in Ukraine saw Russian forces conduct an operational pause after they made territorial gains in the Donbass. I am not too encouraged by the temporary lull in intensity, as it appears that Putin’s government is making efforts to increase mobilization and government control of industries critical to the military in preparation for a protracted and grinding conflict. To me this sounds like history repeating as Stalin implemented similar orders to defeat the Wehrmacht in WW2.
- Former Japanese Prime Minister Shinzo Abe was gunned down at a political event Friday, July 8. He was Japan’s longest serving Prime Minister and father of the “Abe-nomics” and “Womenomics” policies which formulated the super accommodative monetary policy coming out of Japan over the past decades. Political violence and gun violence are very rare in Japan. This event is very significant and has shaken the Japanese population in a way reminiscent of President Kennedy’s assassination. On a personal note, I had the opportunity to meet Prime Minister Abe. He was a gentleman. His vision was right. I believe he built policies in Japan that will not go away.
- Fed Minutes were released last Wednesday. The minutes showed a clearly hawkish bent from the FOMC and that they may be willing to risk a significant economic slowdown to subdue inflation. The minutes suggested members think getting rates to a restrictive level is likely appropriate. Raphael Bostic, usually dovish, also indicated later in the week that he thought another 75-bps hike at the coming meeting was likely. If there is another 75-bps hike, the Fed will be pretty close to the neutral rate which many economists think is likely around 2.5%. My base case remains that the Fed will be “data dependent” as the year progresses.
- Corporate earnings will begin this coming week. JPM, Delta, Pepsi and United Health Group are among those early reporters. I think that weakness in cyclical names, consumer in particular, is likely to be pronounced this season as economic activity has slowed and Wall Street estimates will need to be revised down. From a CEO’s perspective, there likely is not a lot of upside to giving positive guidance given the persistent risks and uncertainty about the resilience of consumer spending power. Financials, money center banks in particular, should provide some clues as to the consumer’s health. Overall, I would anticipate weaker guidance from companies.
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