Market Update - August 12

There wasn't a lot of trading action on Monday. Most of the work was done at the open. After that, the broader market fought to retain its gains, and add to them, on a day that was light on market-moving corporate news, light on economic data, and light on volume.

Monday featured buy-the-dip activity that favored blue chip stocks and value plays, which, in some cases, were one in the same. The end result produced a day of healthy gains for the Dow Jones Industrial Average, which saw only three of its 30 components end in negative territory, and the S&P 500 closing above 4,500 and settling near its highs for the session.

The only economic release on Monday was the June Consumer Credit Report, which showed a $17.9 billion increase in consumer credit (Briefing.com consensus $13.0 billion) that was driven entirely by an increase in nonrevolving credit. Revolving credit saw its first decline since April 2021.

Tuesday's trade had a negative bias following Monday's gains. The major indices all closed near their highs of the session, albeit still sporting losses, after bouncing back from their worst levels of the day. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite had been down as much as 1.2%, 1.3%, and 1.6%, respectively, at their morning lows, but ultimately finished down just 0.4%, 0.5%, 0.8%.

Losses were driven by indiscriminate selling that seemed consistent with normal consolidation efforts. There was comparable weakness by market cap and factor, along with losses in eight out of of 11 S&P 500 sectors and 21 of 30 Dow components.

Concerns about global growth created an excuse for market participants to take some money off the table. Those concerns were stirred by weaker than expected trade data out of China for July that featured a 14.5% year-over-year decline in exports and a 12.4% year-over-year decline in imports. The latter marked the fastest contraction in over two years.

Adding onto those concerns, UPS (UPS) issued disappointing FY23 revenue outlook, citing weakening e-commerce demand and an expectation for lower volumes following the improved labor contract for the lowered guidance.

Weak bank stocks also contributed to the negative bias after Moody's downgraded the credit ratings for 10 smaller U.S. banks and put some bigger banks on watch for downgrade. The SPDR S&P Regional Banking ETF (KRE) fell 1.3% and the SPDR S&P Bank ETF (KBE) fell 1.3%.

Reviewing Tuesday's economic data:

• July NFIB Small Business Optimism Survey 91.9 (Briefing.com consensus 92.1); Prior 91.0
• June Trade Balance -$65.5 bln (Briefing.com consensus -$65.1 bln); Prior was revised to -$68.3 bln from -$69.0 bln
  • The key takeaway from the report is the lack of growth in exports and imports, which is indicative of weaker demand overall at home and abroad.
• June Wholesale Inventories -0.5% (Briefing.com consensus -0.3%); Prior 0.0%

The stock market closed with losses again. The major indices had been following a similar form to Tuesday's trade and looked poised to close on an upswing after rebounding from their lows. The market turned sharply lower ahead of the close, however, and settled near the worst levels of the day.

On Tuesday, the S&P 500 traded down to 4,464 before reversing and finishing the session at 4,499. On Wednesday, the S&P 500 traded down to 4,461 before reversing and stopping short of the 4,500 level, which precipitated the late selling interest. The deterioration was broad and orderly with many stocks participating, but mega cap losses had an outsized impact on index performance.

The Invesco S&P 500 Equal Weight ETF (RSP) was up 0.3% around 3:00 p.m. ET, but closed with a 0.3% loss; the Vanguard Mega Cap Growth ETF (MGK) was down 0.5% around 3:00 p.m. ET, but closed with a 1.1% loss; and the market-cap weighted S&P 500 was down 0.1% around 3:00 p.m. ET, but closed with a 0.7% loss.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index declined 3.1% with purchase applications falling 3.0% and refinance applications dropping 4.0%.
• The weekly EIA crude oil inventories showed a build of 5.85 million barrels following last week's draw of 17.1 million barrels.

The major indices started the session on a strong note, but closed the session flattish in another lightly traded affair. Solid buying interest right out of the gate was fueled by some buy-the-dip action and pleasing economic data that featured the July Consumer Price Index and weekly jobless claims.

The S&P 500, Nasdaq, and Dow Jones Industrial Average were up 1.3%, 1.6%, and 1.3%, respectively, at their morning highs. That move took the S&P 500 above the 4,500 level, which stood as resistance on Thursday.

The initial positive momentum dissipated, though, as mega caps faded from their highs and the 10-yr note yield, which fell to 3.95% in response to Thursday morning's economic data, climbed to 4.08% after a weak 30-yr bond auction. The S&P 500 ultimately moved back below 4,500 and closed near its lows for the day.

Reviewing Thursday's economic data:

• Total CPI was up 0.2% month-over-month in July, as expected, and core-CPI, which excludes food and energy, was also up 0.2% month-over-month, as expected. On a year-over-year basis, total CPI was up 3.2%, versus 3.0% in June, and core CPI was up 4.7%, versus 4.8% in June.
  • There were several key takeaways from the report: (1) there were no hawkish surprises as total and core CPI were spot-on with consensus estimates (2) the shelter index accounted for more than 90% of the increase in the all items index and (3) the all items index less shelter was up just 1.0% year-over-year on an unadjusted basis.
• Initial jobless claims for the week ending August 5 increased by 21,000 to 248,000 (Briefing.com consensus 230,000) while continuing jobless claims for the week ending July 29 decreased by 8,000 to 1.684 million.
  • The key takeaway from the report is that, while initial claims are still running well below recession-like readings, they moved in a direction in the latest week to corroborate the thinking that there is some softening in the labor market, which is what the Fed expects to see (and hopes to see).
• The weekly EIA Natural Gas Inventories showed a build of 29 bcf versus a build of 14 bcf last week.
• The July Treasury Budget showed a deficit of $220.8 billion compared to a deficit of $211.1 bln in the same period a year ago. The deficit in July resulted from outlays ($496.9 billion) exceeding receipts ($276.2 billion). The Treasury Budget data is not seasonally adjusted so the July 2023 deficit cannot be compared to the June 2023 deficit.
  • The key takeaway from the report is that the budget deficit continues to swell. It stands at $1.61 trillion fiscal year-to-date versus $1.375 trillion for all of fiscal 2022. Notably, net interest expenditures in July exceeded national defense spending.

The stock market closed out the first full week of August on a mixed note in a lightly traded session. Market rates jumped in response to a hotter than expected PPI report for July, which created an excuse for investors to continue consolidation efforts that started this month following the stellar start to the year.

The 2-yr note yield, at 4.80% just before the release, rose six basis points to 4.89%. The 10-yr note yield, at 4.08% just before the release, rose nine basis points to 4.17%.

Weak mega cap stocks acted as a drag on the major indices, leading the S&P 500 and Nasdaq to close with losses while the Dow Jones Industrial Average registered a gain. The Vanguard Mega Cap Growth ETF (MGK) fell 0.6% while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat.

The S&P 500 declined 0.1%; the Nasdaq Composite fell 0.7%; and the Dow Jones Industrial Average rose 0.3%. Market breadth also reflected mixed action under the index surface. Advancers led decliners by a slim margin at the NYSE while decliners led advancers by a 4-to-3 margin at the Nasdaq.

Reviewing Friday's economic data:

• July PPI 0.3% (Briefing.com consensus 0.2%); Prior was revised to 0.0% from 0.1%; July Core PPI 0.3% (Briefing.com consensus 0.2%); Prior was revised to -0.1% from 0.1%
  • The key takeaway from the report is that wholesale inflation has come down sharply from its peak in 2022, although with the recent increase in oil and gasoline prices, there will be some concern that further improvement is going to be delayed.
• August Univ. of Michigan Consumer Sentiment - Prelim 71.2 (Briefing.com consensus 70.9); Prior 71.6
  • The key takeaway from the report is that it reflected little overall change in sentiment, due in part to largely steady inflation expectations, as year-ahead and five-year expectations decreased by ten basis points apiece.