Menu
5320 Northshore Drive,
North Little Rock, Arkansas 72118
contact@sowellmanagement.com
You should receive a confirmation email shortly. Don’t forget to reserve your room through the unique Sowell hotel reservation page. You can extend your stay at the Sowell Summit reduced room rate.
WEEK AHEAD
July 22-26, 2024
Last week’s brief respite in tech, which weighed on the S&P 500, masks the current strength in market fundamentals. Our technical indicators support a fully invested position (100%).
Last week’s U.S. stock market was a bumpy rollercoaster ride, blending trepidation following Trump’s assassination attempt and elation from the Fed Chair’s inflation outlook during his Economic Club sit-down interview. The S&P 500 slipped by -1.96%, finding itself caught in a tango between tech weakness following Friday’s global computer outage and broader economic strength, with Retail Sales better than expected. The S&P 500 index, the market-cap weighted index, was weighed down by the Magnificent Seven, Technology and Communication stocks; however, Energy, Financials, and Industrials actually gained +1.84%, +1.45%, and +1%, respectively. Keep in mind that technology-related stocks YTD gain still sits comfortably at +25%.
As interest rates remain unchanged and rising expectations of the Fed cutting rates before the end of the year, investors should pay more attention to their bond positioning. Early in the year, longer-term bond yields were falling with expectations of a rate cut. Though still inverted, the yield curve shows signs that could suggest the beginning of a normalization process. The degree of inversion could start to lessen if long-term yields rise relative to short-term yields. Factors contributing to this could include changing investor expectations about future economic growth, inflation, and Fed policy. This was evidenced by last week’s rise in bond yields for the 7-year to the 30-year period, which indicates a more normalized state if current trends in economic data and market expectations continue. The Fed cutting short-term rates does not mean the entire yield falls; it will depend on the state of the economy.
With the next FOMC meeting on Jul 31 approaching, the latest news of President Biden dropping out of reelection, and earnings guidance from heavyweights (i.e., Alphabet, Tesla, IBM, and AT&T, etc.), investors should not be surprised by an increase in market volatility this week.
“We didn’t gain any additional confidence in the first quarter, but the three readings in the second quarter including the one from last week do add somewhat to confidence.”
— Federal Reserve Chair Jerome Powell, Economic Club of Washington, Jul 16, 2024
Is Inflation Dead? Headline CPI actually drops in June.
The latest report on U.S. consumer prices from the Bureau of Labor Statistics (BLS) was a high-stakes release, with many expecting a Q3 rate cut could hinge on whether June data confirmed the favorable trend established by cooling inflation in April and May. Those holding their breath could exhale with relief as headline CPI declined by 0.1% month-over-month versus a consensus among economists that prices would rise by 0.1%. That’s even better than May’s flat CPI print, which marks the first drop in prices since the early days of the pandemic (see chart).
That small monthly drop implied a bigger move down in year-over-year CPI, which fell from 3.3% in May to 3% in June, a tick below what economists expected. Energy was a meaningful contributor, with gas prices slipping 3.8% from May. Even so, core inflation likewise surprised to the downside, rising just 0.1% in June versus a consensus increase of 0.2%. There was even good news on sticky shelter prices, which posted their smallest month-over-month increase in three years, rising 0.2%—though we must note that still corresponds to a 5.2% year-over-year move.
Chances of September cut on the rise
The rosy inflation report had some calling for a July cut from the Fed, though it won’t surprise readers to hear we don’t see things happening quite that fast. We believe this report meaningfully increases the chances of easing, beginning in September. CME Group reports traders’ bets currently imply a 90% likelihood of a September cut, up from 70% just before the CPI release and a mere 60% at the beginning of July. At this point, we expect the Fed to message a September cut at the July FOMC. Even so, data from now until September will matter as much as ever.
The risk of overshooting moves to the fore.
The Fed has talked about “two-sided risk” facing the U.S. economy: In chair Jay Powell’s words, the bank may “loosen policy too late or too little” on the one hand, versus “too much or too soon” on the other. While both risks seem to have reduced in the last few months, we see the risk of a hard landing, given signs the economy is cooling, as becoming the more pronounced of the two. And what is the risk on the inflation front? Friday’s report on producer prices showed PPI—thought to presage moves in consumer prices—rising 0.2% in June, against expectations of a mere 0.1% increase.
Footnote: Reprinted and revised with permission from Rayliant Investment Research in partnership with Affinity Investment Advisors.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.