Last week’s market activity offered diverse takeaways, with significant variations between mega-cap stocks and the broader market. The mix of economic data, earnings reports, and monetary policy updates adds layers of complexity. For investors, these disparities can offer insights into market trends, highlight opportunities, and caution against potential pitfalls.
Mega-Caps Outperform: Investors Should Be Cautious
- S&P 500: Saw a 0.8% increase
- Invesco S&P 500 Equal-Weight ETF (RSP): Posted a fractional loss
- Russell 2000: Was down 0.3%
- S&P Midcap 400 Index: Remained flat
- Nasdaq Composite: Gained a solid 2.3%
- Dow Jones Industrial Average: Declined by 0.4%
The data shows that mega-cap stocks significantly influenced the performance of market-cap-weighted indices like the S&P 500 and Nasdaq Composite, both of which broke their three-week losing streaks. This divergence matters to investors because a market overly reliant on the performance of a few large companies can be more susceptible to volatility, particularly if those companies experience setbacks. Diversifying one’s portfolio could serve as a risk mitigation strategy in this environment.
Mixed Economic Indicators: A Signal for Caution
- Existing Home Sales: Were weaker due to high mortgage rates and limited supply.
- New Home Sales: Performed better than expected.
- Preliminary Manufacturing and Services PMI: Showed deceleration and contraction in the manufacturing sector.
The economic indicators provide an essential backdrop for investment decision-making. The weaker-than-expected existing home sales and the contraction in manufacturing could serve as early warnings for an economic slowdown, suggesting a more cautious investment approach may be warranted.
Special Spotlight: NVIDIA’s Post-Report Struggles
Despite a strong earnings report from NVIDIA, the stock had trouble maintaining its gains. This scenario indicates that market expectations may already be high while the company is performing well. For investors, it might mean that much of the good news is already priced into the stock, limiting upside potential.
Retail Earnings: Indicators of Consumer Sentiment
The mixed bag from the retail sector, with disappointing results from Macy’s, Dick’s Sporting Goods, Dollar Tree Stores, and Foot Locker, is another sign of a potentially turbulent market. These trends in retail should not be overlooked, as they often serve as leading indicators of consumer confidence, a critical factor for market stability.
These companies have collectively painted a picture of a dwindling landscape impacted by cautious consumer spending and rising incidents of retail theft. As we transition into this week, the focus will shift to high-end retailers like Lululemon and Best Buy. Forthcoming reports from these companies will reveal if their consumer base remains as resilient as some have speculated. However, any signs of a downturn could serve as a warning that even affluent shoppers are not insulated from the repercussions of elevated inflation.
Federal Reserve Maintains Status Quo
Fed Chair Jerome Powell kept his message consistent regarding the 2.0% inflation target and potential rate hikes. For investors, the absence of surprises might offer some stability but also signals that inflationary pressures are far from easing. This message reinforces the need for investors to be vigilant about how inflation could erode real returns on investments.
China’s Economic Woes: A Ripple Effect?
The weakening economic data from China and the subsequent rate cut by the People’s Bank of China (PBOC) have global implications. For investors, China’s economy serves as a significant gauge of global economic health. A faltering Chinese economy could influence sectors such as commodities and manufacturing on a global scale.
The State of Treasury and Currency Markets
- 2-yr Note Yield: Ended at 5.05%, up 14 basis points for the week.
- 10-yr Note Yield: Closed at 4.24%, down one basis point for the week.
- U.S. Dollar Index: Rose 0.8% for the week.
Treasury yields and the dollar index are significant as they often influence asset valuations and international investment flows. For instance, a stronger dollar could make U.S. assets more expensive for foreign investors.
Sectors to Watch
- Best Performers: Information Technology, Consumer Discretionary, and Communication Services all posted gains.
- Worst Performer: The energy sector was down due to concerns about China’s weakening economy.
For investors, sector performance can offer clues about where the market is heading. For example, the poor performance of the energy sector might suggest broader economic concerns, warranting caution or portfolio adjustments.
Last week’s uneven market performance carries important implications for investors. It highlights the need for diversification and attention to various economic indicators. In the face of mixed signals, vigilance and a calculated investment approach can help navigate potential market volatility.
CALENDAR & MOVERS
- Tuesday, JOLTs Job Openings (July)
Wednesday, GDP (QoQ) (Q2)
- Thursday, PCE (Fed Inflation)
- Friday, Jobs Report
The Road Ahead for the U.S. Central Bank
Following Jerome Powell’s remarks last week at the annual Jackson Hole symposium, market players were left largely in the same state of understanding. Powell emphasized the Fed’s readiness to hike interest rates and projected that they will stay high for a prolonged period. He also mentioned that economic deceleration might not be as rapid as initially estimated. This week, two crucial data releases from the Fed will be a labor report and the latest inflation metrics. The release of the Personal Consumption Expenditures (PCE) index is scheduled for Thursday, the Fed’s preferred inflation metric. The employment data for August is expected to be publicized on Friday morning at 8:30 a.m. ET. Financial markets are keenly observing for any indications that economic growth may be tapering off, as this will impact the Fed’s timeline for rate hikes.
Residential Market Trends
Last week’s data revealed a contrasting landscape: sales of existing homes were dropping, while those of new homes were gaining traction, primarily due to a dwindling supply of existing homes. This reduced inventory has so far prevented a more drastic reduction in home prices. This Tuesday, investors can expect updated data on home prices from sources like the S&P/Case-Shiller National Home Price Index and the FHFA House Price Index for June. Despite growing concerns over housing affordability and increasing mortgage rates, prices are predicted to climb for the fifth consecutive month.
The State of U.S. Bonds and Currency
Investors should be vigilant about two key trends that linger from the previous week: the swift uptick in U.S. Treasury yields and the U.S. dollar. Both surged in the wake of Powell’s Jackson Hole speech last Friday. The yields on long-term government bonds reached their highest levels in 16 years last week. Should this week’s economic indicators prove favorable, we could see yields ascend even more as bonds become less attractive. Another development to watch is the U.S. dollar index reaching its peak level since May. Should the market anticipate more interest rate hikes, the dollar stands to gain further.
Last week, the U.S. bond market experienced some significant fluctuations. Most notably, the yields on U.S. Treasuries rose. The 10-year Treasury yield ended 10 basis points higher at 4.26%. Additionally, market traders seemed to be pricing in a greater chance of Federal Reserve action in the near future, pushing 10- and 30-year Treasury yields to two-week highs.
In the broader context, rising interest rates have affected the bond market, causing bond yields and prices to move in opposite directions. This trend has had an impact on other investment types as well. Last week’s movement could also have been influenced by concerns about higher-for-longer interest rates, as suggested by sharp losses in U.S. equities in the previous week.
Market volatility was further fueled by Consumer Price Index (CPI) data, causing 10-year Treasury yields to surge in a volatile trading environment. In summary, last week’s bond market was characterized by rising Treasury yields, market speculation about Federal Reserve actions, and volatility driven by economic data.
Oil & Energy
For the first time in nearly seven weeks, weekly prices of crude oil saw a decline. This downward shift comes after a period of increasing prices, fueled primarily by OPEC and its allies cutting supply and a substantial reduction in U.S. commercial oil stockpiles. Nonetheless, the economic deceleration in China has led to apprehensions about future oil demand, causing the price hike to plateau. European Brent is hovering near its annual high at $84 per barrel, while U.S. WTI is also nearing its year’s peak, priced at $80 per barrel.
Precious Metals & Gold
The spotlight this week is on gold. Elevated premiums on physical gold in China have reached their highest since the end of 2016, spurred by economic uncertainty and the ensuing appetite for more secure investments. Conversely, the uptick in bond yields and an increasing US dollar have negatively impacted gold prices, closing the week at $1,892. Silver remained relatively unchanged for the week, priced at $22.68 per metric ton. Similarly, nickel stayed at $20,220, while aluminum and zinc held steady at $2,160 and $2,480 respectively.
Last week, the cryptocurrency market experienced significant downturns, with major cryptocurrencies like Bitcoin and Ethereum trading near two-month lows. Bitcoin, in particular, fell below the $26K mark, marking its most significant weekly drop recently. The market as a whole faced sudden and severe volatility, shedding over $600 billion in total value. Contributing to this instability were proposed tax reporting rules from the U.S. Treasury Department and various macroeconomic factors that sapped the market’s momentum. Given the turbulent conditions, investors are advised to tread carefully, considering the elevated risks and the possibility of an extended crypto crisis.