Weekly Market Update 08/14/2022
by Justin J. Long CFP®, on Aug 14, 2022
Happy Sunday! School kicked off this week for the vast majority of the valley and all the first day back jitters, along with photos of all the kiddos headed back to school, filled up our week here in Las Vegas.
Speaking of kick-off, the Las Vegas Valley is abuzz about the Las Vegas Raiders, who are playing their first preseason game today at the newly-minted "Death Star" aka Allegiant Stadium. With football season back, what are some of your football favorite recipes to make on these Sundays?
And now on to the recap of this week:
The stock market saw some real inflation this week, largely because it saw signs of disinflation in the Consumer Price Index (CPI), Producer Price Index (PPI), and Import-Export Price Index reports for July. They all went the market's way, which is to say they supported the peak inflation narrative.
The gains were broad based and substantive. The S&P 500 scored its fourth straight weekly advance and crossed an important level (4,231) that some will interpret as a telltale signal that the low in June was the low for the bear market.
Notably, the week's gains were secured almost entirely over two trading sessions (Wednesday and Friday). Prior to Wednesday, which is when the CPI report was released, the major indices were all sporting losses for the week. The tepid start was attributed to reservations about the market being due for a pullback after the big run off the mid-June lows, some caustic revenue warnings from NVIDIA (NVDA) and Micron (MU), and some nervousness in front of the CPI report.
The latter, though, proved to be a major turning point for sentiment. Total CPI was unchanged month-over-month and core CPI, which excludes food and energy, was up a smaller-than-expected 0.3%. Importantly, the annual pace of total CPI moderated to 8.5% from 9.1% while the annual pace of core CPI held steady at 5.9%, meaning it did not move higher as had been feared.
This understanding triggered a huge upswing in the major indices, as investors relished the idea that inflation might have peaked, that the Fed might be able to temper the pace of its rate hikes, and that the U.S. economy, which learned last week that 528,000 positions had been added to nonfarm payrolls in July, might be able to enjoy a soft landing.
Various Fed officials attempted to downplay the idea of the Fed being ready to take its foot off the rate-hike pedal, not to mention pivoting in 2023 to a rate-cut cycle, yet equity market participants seemed to disregard the warnings.
Notwithstanding such warnings, the prevailing view in the stock market was that inflation rates will continue to moderate in coming months and that Fed officials will ultimately be convinced to soften their hawkish-minded tone as a result. It only helped the stock market's mood to see the PPI data and Import-Export price data move in the same direction as the CPI data.
Granted stocks were unable to hold a rally effort in the wake of the PPI report on Thursday, but by Friday morning, that move had been written off as just a case of taking some money off the table after a big move. Come Friday buyers were back in action while sellers were a mostly sidelined bunch.
The major indices all went out on a high note in a grinding rally effort on Friday that wasn't matched with heavy volume but which was impressively resilient nonetheless. The S&P 500, which was flirting with 3,600 in mid-June, settled Friday at 4,280. The close above 4,231 will be seen by some as an important technical and psychological development. That level marked a 50% retracement of the losses suffered between the January 3 closing level (4,796.56) and the June 16 closing level (3,666.77).
Last week, BTIG technical analyst, Jonathan Krinsky, informed CNBC that "Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows." That doesn't mean it is off to the races from here nor does it mean the market is immune from another selloff of some size, but it does resonate for some as a beacon of identifiable downside risk and a reassuring historical precedent.
All 11 S&P 500 sectors closed higher for the week. Gains ranged from 1.2% (consumer staples) to 7.1% (energy). Cyclical sectors saw some of the biggest gains and value stocks outlegged growth stocks in a move that showed reduced fears about the economy suffering a hard landing. The Russell 3000 Value Index increased 3.9% versus a 3.0% gain for the Russell 3000 Growth Index.
There was also a revival this week of speculative activity that translated into huge percentage gains for many of the so-called meme stocks, as well as the SPAC and profitless story stocks that were all the rage last year. Their moves were clear reflections of a risk-on mindset driven by the hope that the Fed won't have to go as far as it thinks into restrictive rate-hike territory.
The Treasury market wasn't as convinced of that point as the stock market seemed to be. The 2-yr note yield, which is sensitive to changes in the fed funds rate, ended the week up two basis points at 3.25%, virtually unchanged from where it was when the CPI report was released on Wednesday. The 10-yr note yield settled the week up one basis point at 2.84%, up about five basis points from where it was trading before the release of the CPI report.
To be sure, inflation moderated in a welcome development, but it is still unacceptably high. The Fed's inflation target is 2.0%, whereas CPI is up 8.5% year-over-year and PPI is up 9.8% year-over-year. There is a lot more room for inflation improvement and there needs to be a lot more improvement to convince the Federal Reserve that inflation is back under control.
That will be an ongoing war, but there was no doubt that the stock market won the mental battle this week in seeing what it wanted to see, which was a lower inflation rate in July than it saw in June.
- Dow Jones Industrial Average: -7.1% YTD
- S&P Midcap 400: -8.0% YTD
- S&P 500: -10.2% YTD
- Russell 2000: -10.2% YTD
- Nasdaq Composite: -16.6% YTD
|INDEX||STARTED WEEK||ENDED WEEK||CHANGE||% CHANGE||YTD %|
As always, it is my pleasure to bring you this weekly update. If this or anything else is causing you pause or you would like further details, please feel free to reach out to me and we can schedule some time to chat.
Justin J. Long CFP®
Diazo Wealth Group
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Source: 1. FactSet
Source: Week in perspective provided by Briefing.com. Briefing.com offers live market analysis on their web site www.Briefing.com.
The data provided is for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. The information contained here is not guaranteed as to accuracy or completeness. All economic and performance information is historical and does not guarantee future results.
The Dow Jones Industrial Average is a price-weighted index comprising 30 widely traded blue chip U.S. common stocks. The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on the NASDAQ stock exchange. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. The Cboe Volatility Index (VIX) shows the market’s expectation of 30-day volatility and is constructed using the implied volatilities of a wide range of S&P 500 Index options. Weekly and year-to-date figures for the VIX show percentage changes, not investment returns. The Russell 2000 Index tracks the performance of approximately 2,000 publicly traded small-cap companies in the United States. It is not possible to invest directly in an index.
The Treasury yield curve is derived from available U.S. Treasury securities trading in the market and is provided directly by the U.S. Federal Reserve. The spread measures the difference in yield between two government securities. A normal (positive) yield curve occurs when longer-term rates are higher than shorter-term rates. The opposite holds true for an inverted yield curve. Year-to-date changes in U.S. Treasury bond yields are shown in basis points (bps). One hundred basis points equals one percent.
Oil prices are represented by West Texas Intermediate (WTI) crude oil.
The G20 countries comprise a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85% of global gross domestic product, and over 75% of global trade.
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