Published July 14, 2023
Below is a snapshot of Blaine Rollins’ regular survey of economic and market information. As we have noted, markets in June solidified a new bullish tone. Here are some datapoints and observations from Mr. Rollins noting why investors increasingly believe the Fed might succeed in tamping inflation down while economic growth remains solid – the so-called “soft landing” scenario.
Remove the hotshot megacap stocks that have fueled the market upside so far this year and you have a stock market that’s a bit cheaper than average:
Stock investors got the news they had been waiting for this week: waning inflation data gave investors renewed confidence in the Federal Reserve’s soft landing scenario.
While the major indices didn’t appear to move much on Monday (the S&P500 only rose 0.2%), much was afoot as advancers led decliners by 2-1. Also on Monday, NASDAQ announced a Special Rebalance of the NASDAQ 100 index will occur prior to the market open on July 24th to reduce the influence of megacap stocks (new weightings should be announced on Monday, July 17th. On Tuesday, stocks rose broadly, with the energy (+2.2%), industrials (+1.2%), and financials (+1.2%) registering the largest gains.
The real fireworks came on Wednesday when the Consumer Price Index (CPI) report showed dramatic slowing in the rate of inflation with the smallest 12-month increase in total CPI since March 2021. Investors cheered, feeling more confidence in the Fed’s rate hike regime and renewed hope that the Fed has one, maybe two at the most, rate hikes to go before eventually cutting rates next year. As a result, bond yields fell fairly dramatically with the 10yr pulling back to 3.86% when it had been over 4% earlier in the week. Not surprisingly, megacap stocks popped another 1.3% on the day, twice the gain of the S&P500.
Delta Airlines and Pepsi both posted better-than-expected earnings and guidance on Thursday while the previous day’s CPI good cheer seemed to carry over to more sectors boosting semiconductor (+2.4%), communication services (+2.3%), information technology (+1.5%), and consumer discretionary (+1.1%).
Finally, Friday brought earnings releases from JP Morgan Chase, Wells Fargo, and Citigroup, all of whom surpassed expectations but added a tinge of restraint in their outlooks for the following quarter which led to modest declines in bank stocks. United Health shared surged 7.2% on strong earnings to help the healthcare sector buck the mild across-the-board Friday profit-taking after the stocks had robust gains the prior four days. While stocks initially looked strong to open the day, the NASDAQ and S&P500 closed marginally negative while the Russell 2000 fell 1% after having been up 4.6% for the week going into Friday’s session.
Capping off the second week of the historically two strongest weeks of the year, stocks posted big gains with the S&P500 up 2.5% and the NASDAQ up 3.5%.
Warm wishes and until next week.