The Week That Was: A Broadening of Buying Interest

As we wrap up another week of trading, it’s clear that the financial markets continue to be a roller coaster ride of ups and downs. But amidst the turbulence, there’s a silver lining: a broadening of buying interest. This week, we saw a shift in investor focus from mega-cap stocks to a more diverse range of options, signaling a potential change in market dynamics. But what does this mean for you, the investor? Let’s dive in.

Key Market Movers

• Existing Home Sales: The U.S. housing market is experiencing a slowdown, with existing home sales falling to their lowest level in 14 years. In June, home sales were down 18.9% compared to last year’s period, reaching a seasonally adjusted annualized rate of 4.16 million units. This is largely due to a lack of supply in the market. For investors, this could signal a potential shift in the housing market dynamics, affecting related sectors such as construction and home improvement.
• FedNow Payment Service: The Federal Reserve has launched a new payment service, FedNow, which allows for instant transfers between banks and their customers. Notably, 35 early adopters, including JPMorgan Chase and Wells Fargo, have already signed up. This development could potentially revolutionize the way transactions are conducted, offering investors in the banking and fintech sectors new opportunities for growth.
• U.S. Retail Sales: Retail sales in the U.S. saw a modest increase of 0.2% in June, reflecting a shift in consumer spending habits and indicating a softening in some parts of the U.S. economy. The shortfall was mainly due to a decline in spending at gas stations. This could be a concern for retail and consumer goods investors, as it may signal a potential slowdown in consumer spending.
• U.S. Leading Economic Index (LEI): The LEI fell for the 15th consecutive month in June, marking a 7.82% decrease compared to the previous year. This level is consistent with previous recessions, which could be a red flag for investors as it might indicate a potential economic downturn.
• Recession Probability: Goldman Sachs has reduced the probability of a recession in the next year following a slew of positive economic data. They now estimate there is only a 20% to 25% chance the U.S. will experience a recession in the next twelve months. This could be a positive signal for investors, suggesting a more stable economic outlook.
• TSMC Factory Delay: Taiwan Semiconductor Manufacturing Co. (TSMC) has delayed the start of its Arizona chip factory due to a shortage of skilled labor. The company plans to send trained technicians from Taiwan to train local workers. This could impact investors in tech companies like Apple, which plans to use chips built at that plant.
• Ford F-150 Lightning Price Cut: Ford has reduced the price of its F-150 Lightning by $10K, attributing the cut to its efforts to boost production and lower costs for battery minerals. This could be of interest to investors in the electric vehicle sector, as it could signal increased competition and potential shifts in consumer preferences.
• China’s Q2 GDP Growth: China’s economy grew by 0.8% in the second quarter, slower than the 2.2% quarter-over-quarter pace recorded in the year’s first three months. This could be a concern for investors with exposure to the Chinese market or companies heavily reliant on Chinese demand.

The Mega-Cap Underperformance

The week started with the Dow Jones Industrial Average extending its winning streak to ten straight sessions, a sizable gain led by Johnson & Johnson (JNJ), IBM (IBM), and Travelers (TRV) following their earnings reports. However, mega-caps were relative underperformers due to profit-taking activity and valuation angst ahead of a big week of mega-cap earnings.

The Vanguard Mega Cap Growth ETF (MGK) fell 1.0% this week, while the Invesco S&P 500 Equal Weight ETF (RSP) gained 1.4%. Tesla (TSLA) and Netflix (NLFX) were top laggards, experiencing some consolidation following their better-than-expected Q2 earnings results.

But why did this happen? Why did investors turn away from these behemoths of the market? The answer lies in anticipation of earnings reports from Alphabet (GOOG) and Microsoft (MSFT) on Tuesday and Meta Platforms (META) on Wednesday. It seems investors were hedging their bets, waiting to see how these giants would perform before making their move.

The Rise of Bank Stocks

While mega-caps were underperforming, bank stocks were on the rise. Bank of America (BAC), Northern Trust (NTRS), M&T Bank (MTB), Western Alliance (WAL), and U.S. Bancorp (USB) all logged nice gains after their earnings reports. The SPDR S&P Regional Banking ETF (KRE) jumped 7.5% this week, while the SPDR S&P Bank ETF (KBE) rose 6.7%.

This surge in bank stocks is a testament to the financial sector’s strength and the economy’s resilience. Despite fears of a recession, these earnings reports did not imply any significant concerns, suggesting that the economy is on a steady path to recovery.

The Soft Landing View

This week’s economic releases corroborated the soft landing view. Weekly initial jobless claims came in at the lowest level (228,000) since Mid-May, which was good news regarding the state of the labor market. The retail sales report, meanwhile, looked weak at first with total sales declining 0.2%. However, control group sales, which factor into the computation for personal spending in the GDP report, were up a solid 0.6%.

Housing data was more softish but still didn’t contain anything alarming. Total housing starts declined 8.0% month-over-month to a seasonally adjusted annual rate of 1.434 million, and building permits decreased 3.7% month-over-month to a seasonally adjusted annual rate of 1.440 million.

The Shift in Investor Focus

With the soft landing narrative still intact, market participants were inclined to fade mega caps and buy non-tech and value stocks. There is less valuation angst among those stocks, which led to the preferential treatment this week. The Russell 3000 Value Index rose 2.1% while the Russell 3000 Growth Index fell 0.5%.

The S&P 500 healthcare sector (+3.5%), boosted by Johnson & Johnson (JNJ) and Abbott Labs (ABT), and the energy sector (+3.5%) saw the biggest gains. The communication services sector, meanwhile, was the top laggard by a decent margin, falling 3.0%.

The Takeaway

What does all this mean for you, the investor? It’s a reminder that the market is always changing, always evolving. Mega-cap stocks may have been the darlings of the market in the past, but this week’s trading shows that there’s a broadening of buying interest. Investors are looking beyond the mega-caps, exploring other sectors and opportunities.

So, as we look ahead to the coming week, remember this: the market is a vast ocean, filled with a multitude of opportunities. Don’t limit yourself to the mega-caps. Explore the smaller, lesser-known stocks. You might just find a hidden gem.

And remember, investing is not just about making money. It’s about understanding the market, learning about different sectors, and making informed decisions. So, keep learning, keep exploring, and keep investing. The market is a vast ocean, and you’re the captain of your ship. Navigate wisely.

CALENDAR & MOVERS

• Tuesday, July 25 – CB Consumer Confidence (July)
• Wednesday, July 26 – Fed Interest Rate Decision
• Federal Reserve Watch
• Earnings Reports
• ECB Move
• BOJ Move

Federal Reserve’s Crucial Week

Investors are keenly observing the Federal Reserve’s latest policy-setting meeting, where a rate hike is highly anticipated. The Fed had previously paused rate increases in June to combat surging inflation, marking the end of the fastest monetary policy tightening cycle in over four decades. However, the market is expecting the Fed to adopt a more hawkish stance. Analysts at Goldman Sachs (GS) speculate that this forthcoming hike could be the final one in the current tightening cycle. The central question is how vigorously Fed Chair Jerome Powell will push for a “careful pace” of tightening, which some interpret as rate increases at every alternate meeting. The Fed’s readiness to tolerate higher inflation than preferred might be crucial for the U.S. economy to achieve a soft landing.

Earnings Take Center Stage

This week marks the peak of the summer earnings season on Wall Street, with over 150 S&P 500 companies slated to disclose their quarterly results. The spotlight will be on the earnings announcements from tech giants Microsoft (MSFT), Alphabet (GOOGL), and Meta (META). The performance of these large growth and technology stocks, which have been instrumental in driving the market upward this year, will be under intense scrutiny by investors. Telecom behemoths Verizon (VZ) and AT&T (T) are also set to release their respective quarterly financial results on Tuesday and Wednesday. Given recent revelations about lead-sheathed cables that led to a sharp fall in their shares in early July, investors are keen to see how these companies have performed. This bustling week of earnings announcements will provide investors with a comprehensive view of the performance and prospects of major corporations across diverse sectors.

ECB’s Anticipated Move

The European Central Bank (ECB) is widely expected to raise interest rates by 25 basis points at its meeting on Thursday. Market participants are split on whether the ECB will opt for another rate hike or a pause in September. Despite a decline from its December peak of 10.6%, inflation in the eurozone remains significantly above the ECB’s 2% target. The central bank has conceded that additional steps are necessary as inflation is expected to stay elevated for a prolonged period.

BOJ’s Policy Announcement

The Bank of Japan (BOJ) is set to reveal its monetary policy decision this week, an announcement that investors are eagerly awaiting due to ongoing speculation that the BOJ might alter its ultra-accommodative monetary policy in response to mounting price pressures. Recent data shows that Japan’s core inflation remained above the central bank’s 2% target in June for the fifteenth month in a row. However, an index excluding energy costs showed a slowdown, suggesting that price pressures might have reached their peak. The BOJ is likely to maintain its current interest rates and yield curve control, possibly with a slight upward revision in its inflation outlook.

BONDS

This week, the bond market saw a flurry of activity across the globe, with significant movements in the US, China, and Japan.

In China, overseas investors have been flocking back to Chinese bonds, adding 90.6 billion yuan ($12.6 billion) of notes in the country’s interbank market last month. This has raised their total holdings to 3.28 trillion yuan. The renewed interest in Chinese debt is driven by expectations that US interest rates will soon peak and the appeal of Beijing’s monetary easing.

However, the Chinese real estate industry is facing a crisis, with stocks and bonds hitting eight-month lows due to concerns about a cash crunch at major developers, Country Garden and Dalian Wanda. The sector is grappling with fears of defaults similar to the China Evergrande situation, leading to a significant drop in investor confidence.

In the US, the bond market was relatively quiet as investors prepared for a significant week of central bank meetings. The US and Europe are expected to raise rates by +25bps, with potential uncertainty on the US side due to a softening labor market and inflation data. Additionally, banks led by Wells Fargo & Co. initiated the second phase of the debt sale related to Apollo Global Management Inc.’s acquisition of Arconic Corp, offering $900 million of seven-year notes.

Meanwhile, the yen bond market for global firms is thriving, offering money managers stability amidst rising rate volatility. July 2023 has been the busiest since 2018, with notable issuers like Toronto-Dominion Bank, Korea Investment & Securities, and BPCE participating. Since April 1, ¥1.44 trillion ($10.2 billion) worth of bonds have been issued, the highest in five years.

In summary, this week in the bond market was marked by significant global activity, with investors closely watching central bank meetings, rate hikes, and the ongoing crisis in China’s real estate industry. These developments will continue to shape the global financial landscape as we move forward.

COMMODITIES

Oil & Energy

Brent crude continues to hover around the $80 per barrel threshold. Despite being on track for a fourth consecutive week of gains, the weekly increase remains modest due to mixed economic data from China that has impacted financial sentiment. Additionally, the strengthening US dollar is exerting pressure on oil prices, which are denominated in dollars. However, two factors are providing a buffer to prices. Firstly, the oil market is moving towards a tightening phase characterized by a constrained supply and relatively robust demand. Secondly, the potential for the Fed to implement its final rate hike of the year could mitigate its impact on the slowing US economy. As for prices, North Sea Brent is trading at approximately $80.40 a barrel, while its US counterpart, WTI, is trading around $76.45.

Precious Metals & Gold

Metal prices have generally retreated this week. A tonne of copper is trading at approximately $8500 on the London Metal Exchange. The increase in inventories and the impact of currency fluctuations are curbing buying pressure. In mining news, Antofagasta has lowered its copper production forecasts for this year, citing the impact of severe water shortages in Chile. Gold has nudged up to $1,960 in the precious metals sector, with no other significant movements to report.

CRYPTOCURRENCY

Bitcoin has dipped 1.5% since Monday, trading around $29700. Ether is experiencing a slightly steeper decline, down 1.80% and teetering around the $1900 mark. The cryptocurrency industry continues to grapple with regulatory ambiguity in the US, leading to legal action by the US Securities and Exchange Commission (SEC) against industry heavyweights such as Coinbase and Binance. This has resulted in a significant decrease in trading volumes for the main assets in recent weeks, indicating a potentially subdued summer period for cryptocurrencies.