Published August 16, 2024
It was only one week ago that markets came unglued as fears of a “hard landing” coupled with a Japanese Yen market shocker to unnerve investors. But that was last week. Here is Delta Research’s take on the recent market and economic action:
“The market is resilient. It digested a $20 trillion yen carry trade crisis in three days last week. The S&P 500 is back to within 2.7% of its all-time high. The economy is expanding. The Atlanta Federal Reserve Bank is forecasting 2.9% real GDP growth in the third quarter. Earnings and revenues were better than expected for the second quarter. With over 90% of the S&P 500 having reported, revenue growth was 5.2% and earnings growth was 10.8% versus expectations of 4.5% and 8.5%. Consensus estimates for S&P 500 earnings next year are now $280, up from about $275 at the start of 2024.
According to the Producer Price Index (PPI) and the Consumer Price Index (CPI) reports this week, the disinflation trend is moving in a direction necessary to drive a rate cut by the Federal Reserve in September. The Fed Funds Futures market shows the probability of at least a 0.25% rate cut in September is 100%.
Core retail sales were up 0.4% month-over-month in June. Retail sales outpaced the rate of inflation suggesting increased sales were driven by increased demand in addition to higher prices. Walmart (WMT) reported better than expected earnings and raised FY 2025 guidance. U.S. comparable store sales were up 4.2%. The stock jumped 8% on the news to an all-time high. Solid levels of discretionary spending undermine recession concerns.
The primary market concern today deals with seasonality. The chart below shows the two worst months of the year for the market on average since 1995 have been August and September.
Other concerns involve rising unemployment, rising consumer debt delinquencies and a potential slowdown in consumption by lower-end consumers. It is not clear if any of these concerns are the result of emerging trends or if the data is both volatile and normalizing. Walmart’s management specifically said they do not see deterioration in spending by their customers and initial jobless claims decreased for the second week in a row.
The S&P 500 is about where it was at the start of the month. Given the volatility index (VIX) reached its third all-time highest reading at the start of the month, the recent price action of the S&P 500 is a victory for bullish investors.”
Market Update
After battling back from the abyss last week, investors looked to fresh inflation updates this week in hopes of keeping the rebound going. Would inflation continue to trend downward paving the way for September Fed interest rate cuts? Ahead of those reports, stocks traded flat Monday. The first of the inflation reports hit the wires Tuesday with Producer Prices only up +0.1% from the prior month (thus a below-target +1.2% annual inflation rate). Stocks rallied on the news while bond yields fell. That sentiment flowed into Wednesday with stocks adding another +0.4%. Consumer prices showed inflation running under +3% for the first time in three years – all but insuring the Fed will cut rates in September. Investors quickly began debating whether the central bank might even opt for a 0.5% cut. The cheer rolled on Thursday with nothing but good news: a positive surprise in retail sales growth confirmed by strong sales growth at retail behemoth Walmart. Walmart surged +6% after their earnings report as the company saw no deterioration at all in customer demand. This assuaged investor fears after other retailers reported concerns about demand last week. Stocks zipped higher by +1.6%. Stocks held their gains in Friday’s session adding +0.2% as investors have quickly returned to the “soft landing” economic narrative – a nirvana scenario for stocks where growth is strong while interest rates ramp down.
Stocks posted their strongest week of the year recovering all of the damage from the first week of the month. The S&P 500 vaulted +4.00% for the week. The Nasdaq 100 (QQQ) gained +5.47%. Small-cap stocks lagged posting a +2.97% increase.
Warm wishes and until next week.