This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.
ECONOMIC HALFTIME REPORT: STOCKS AND BONDS CLOSE LOWER FOR A 2nd STRAIGHT QUARTER.
US Markets
The end of June marked the end of the second quarter and first half of this year. Last quarter, April through June, was the first time since 2008 where both stocks and bonds closed lower two consecutive quarters. Bianco Research shared data showing the S&P 500 is off to one of its worst starts ever. Going back to 1927, market participants have only seen larger losses to start the year in 1932, 1962, and 1970. Data from All-Star Charts shows last week was the 34th consecutive week with more stocks printing 52-week lows than 52-week highs. Bonds have not held up any better. The Bloomberg Aggregate Bond Index is off to its worst start going back to 1976. Commodities, as a group, has been the one positive asset class this year-to-date. The strength was broad amongst commodities, but deteriorated into strength from solely energy, and now even the trends in energy have deteriorated. The Bloomberg Commodities Index has fallen considerably during June. Notwithstanding last month’s tumble lower, the Bloomberg Commodity Index is still roughly 18% above where it started this year.
As of now, weighing the evidence in-hand, the near-term outlook remains challenging. This environment requires patience and discipline. As the revered investor Benjamin Graham once counseled, “The investor’s chief problem—and even worst enemy—is likely to be oneself.”
Equities leadership, aside from energy which has recently given back most of this year’s gain, has been in very defensive areas of the market that offer low-volatility and large dividends such as utilities, energy, and consumer defensive areas. Remember, in this bear market context, leadership does not necessarily mean rising stock prices. Instead, it means they have not gone down as much. Many sectors and industries have formed tops and resolved lower. The list is long. It includes financials, homebuilders, transportation, semiconductors, copper, lumber, and many more. Willie Delwiche CMT and CFA, of All-Star Charts, describes 2022, “…in a nutshell, commodities are the best thing going and even over half of them are in bear markets.” I would add to this, another important theme has been the unrelenting strength of US Dollar Index.
As of Friday’s Close, 07/15, this year-to-date, the S&P 500 is down almost 19%. The tech-driven Nasdaq 100 is down more than 26%. The “blue chip” Dow Jones Industrial Average is down almost 13%. The speculative, small-cap Russell 2000 is down just over 22%. Of the 11 large cap-weighted S&P sectors, only energy is positive this year-to-date. Up more than 23% is a good place to be, though energy has given back roughly one third of its gain from the March 2020 low.
Economic & Market Moving Headlines
Even with most equities falling lower, we can find a few companies trending higher. The healthcare space has been strong with pharmaceutical names such as Eli Lilly & Co. (LLY) and Merck & Co. (MRK) printing an all-time and a multi-decade high respectively. The healthcare provider Humana Inc. (HUM) printed an all-time closing high last week. In the energy space, we have the coal name Consol Energy (CEIX) also closing at an all-time high. When you turn on financial media, the general commentary is "nothing is working right now." Have a look at Biotech. Using the SPDR ETF XBI, one of the biggest laggards over the last year, it is up nearly 30% from its June lows.
Last week, 07/11-7/15, the bulk of the economic data started flowing on Wednesday. First up was inflation data from the US Bureau of Labor Statistics (BLS) in the form of the monthly Consumer Price Index (CPI). The CPI measures the average change over time in prices paid by urban consumers for goods and services. The headline number for June increased to a year-over-year change of 9.1%. This was a 1.3% increase from last month. Inflation numbers this high were last seen in 1982, 4 decades ago. Based on the CPI report, The Federal Reserve Bank of Cleveland publishes its Median CPI number. This inflation rate takes CPI component(s) whose reading is in the 50th percentile of price changes. By omitting outliers, both large and small, and focusing on the interior of the distribution of price changes, economists argue the median CPI offers a better understanding of the underlying inflation trend. Year-over-year the Median CPI inflation rate rose to 6%. Month-over-month it rose 0.7%. The 6% reading is the highest print for this data series ever, with data going back to 1983.
On Thursday, 07/14, we had another inflation report from the BLS. This time it was in the form of the Producer Price Index (PPI). The PPI measures the average change over time in prices paid by domestic producers for the goods and services that go into their output. On an unadjusted basis, their prices paid moved up 11.3% year-over year, the largest increase since a record 11.6% jump during March of this year. The report adds, “In June, three-fourths of the advance in the index for final demand was due to a 2.4-percent rise in prices for final demand goods. The index for final demand services increased 0.4 percent.”
Also on Thursday, considered a leading economic indicator, we received the 4-week moving average of initial unemployment claims from the Department of Labor. While this average has been rising for the last 14 weeks, the number is historically very low. The same is true for the unemployment rate, which has been 3.6% for the last 4 weeks. This low level of unemployment was last seen in the 1960s. An interesting note from the report cites New Jersey to be the state with the highest level of unemployed last week, 04/04-07/10.
On Friday, 07/15, we received another leading economic indicator. This was in the form of the University of Michigan’s Consumer Sentiment Index. This data continues its nosedive into territory consistent with recessionary periods such as 2008, 1990, and 1982. That said, the last reading did have a small uptick in sentiment.
Also on Friday, considered a coincident economic indicator, we received retail sales. This series is used by economists to judge if consumers feel confident about current and future economic activity. While the series pressed to an all-time high while rising 1% month-over-month, the devil, as always, is hidden in the details. While the headline reading was positive and growing, when we calculate the real retail sales figure, meaning adjusted for inflation, the series declined for the 2nd month in a row. The data set itself peaked in March of 2021 over a year ago. That tells a different story than that of a growing headline reading.
In addition to economic data, last week officially kicked off earnings season. The potentially pivotal earnings season began the largest banks announcing results.
JPMorgan Chase (JPM), the nation’s largest bank, showed serious declines in its investment banking business while asset volatility boosted revenue from their trading business. The tone was serious, and they expressed caution regarding the future. Overall, JPMorgan reported earnings of $2.76 per share on revenue of $30.7 billion, versus the $2.89 per share and $31.8 billion expected by analysts. The report was a miss. Net income of $8.9 billion was down by 24% from the same quarter a year earlier. Barron’s wrote, net income “was dragged down by a $657 million write down of JPMorgan's loans, and a $428 million addition to the bank's reserves for loan losses. The latter is money set aside in anticipation of potential defaults or uncollected payments on debt such as credit cards, mortgages, or business loans. It counts as an expense in the quarter it's recorded, but it's just cash moving around the balance sheet, not flowing out the door.”
The bank’s CEO, Jamie Dimon, shared an opinion of mixed sentiment. He believes the economy is still growing, the job market is still healthy, and consumer spending remains healthy. On the other hand, he said the data is pointing to a challenging environment ahead. With the bank adding to its reserves and preparing for uncertainty, JPM missed The Street’s expectations for the first time in nine quarters.
At Morgan Stanley (MS), things were similar. Barron’s wrote, MS reported “…companies are reluctant to go public amid challenging market conditions. Meanwhile, merger and acquisition activity is drying up as buyers face higher costs due to rising interest rates while would-be sellers are reluctant to be bought at lower valuations.”
Citigroup (C) beat analysts’ earnings and revenue expectations significantly. As a result, the stock rallied over 13% on Friday. Keep in mind the context of Friday’s massive move higher. C is down more than 45%, peak to trough, since it peaked in June of 2021. It was the only bank that topped revenue expectations last week. Its operations benefited from rising interest rates and strong trading results.
Wells Fargo (WFC) missed on revenues but did just beat on earnings. It cited declining mortgage revenue and problems with its venture capital division. Blackrock (BLK) reported a 30% fall in year-on-year profits. State Street reported better than expected earnings with revenues that declined less than expected. United Healthcare (UNH) beat earnings on the top-line revenue and bottom-line earnings.
International Markets
International markets have fallen considerably this year-to-date. We had a lot of commodity heavy countries performing very well into this year, however, at this point, of the 78 international ETFs that East Coast Charts Research tracks, we are down to only 2 with minuscule gains. Those are Chinese Energy (CHIE) and Chile (ECH). The serious gains from Qater (QAT), Saud Arabia (KSA), and several Latin American countries have all come crashing down through the last 3 months. Broadly speaking, emerging markets, frontier markets, and developed markets ex-US are all well below their pre-Covid prices. This is not true for US equites, making them, as a whole, stronger than the rest of the world.
Fixed Income
The fixed income space is not faring better than equites despite their bounce over the last several weeks. Many market participants are calling for a bottom in bonds as concerns move from inflation to economic weakness. The evidence for a bottom in bonds is accumulating, though this thesis has not been confirmed by the charts. Bank of America has some data suggesting bonds are on pace for the worst year since the American Civil War during the early 1860s. There is a lot of year to go, though the point is clear: Sentiment and performance have been negative. Year-to-date, US Treasuries have fallen by as much as 22% depending on maturity. Mortgage-backed security bonds are down about 10% on average, while municipal bonds are down about 8%. Corporate bonds are down roughly 7% on average.
Commodities
Commodities have been a desirable asset class since the Covid-decline more than 2 years ago. At some point this year, many commodities were trending higher. Unfortunately, now, the majority of commodities have been crashing and have giving back their year-to-date gains. Energy, using the SPDR ETF XLE, was up almost 70 this year-to-date as of June. Since then, it has fallen though remains positive. It is roughly 25% above where it began 2022. XLE is at an important price level now. The resolution, up or down, will be telling.
The Week Ahead
Earnings season kicks into high gear this coming week, 07/18-07/24, with roughly 70 S&P 500 companies reporting. Of note, we have International Business Machines (IBM), Bank of America (BAC), Goldman Sachs (GS), Netflix (NFLX), JB Hunt (JBHT), Tesla (TSLA), American Airlines (AAL), CSX (CSX), DOW (DOW), Snap Inc. (SNAP), Capital One (COF), DR Horton Inc. (DHI), Domino’s Pizza (DPZ), American Express (AXP), Twitter (TWTR), and Verizon (VZ).
It will also be a busy week for economic releases. Events on the economic calendar include several U.S. housing-market data releases, housing starts and building permits, as well as a pair of monetary policy decisions from abroad with the European Central Bank expected to raise its benchmark interest rate for the first time since 2011. The U.K. and Japan are set to release their latest inflation figures. The Conference Board releases its widely watched leading economic index for June on Thursday, and S&P Global releases both its manufacturing and services purchasing managers’ indexes on Friday.
Key Takeaways
It was another volatile week amid mixed economic and corporate earnings reports. Market participants are continuing their effort to gain insights into US inflation and economic growth prospects. At the time of this writing, we have the broader markets deciding which way to move next as we enter the heart of earnings season. We are dealing with the inflation and Federal Reserve narrative, being horrified by Russia’s war in Ukraine, seeing bearish consumer sentiment, and listening to economic calls for every possible scenario from inflation to stagflation, to deflation, to recession, to economic growth.
Earnings season will be a test of faith for the bag-holders desperately hoping for good news from their favorite company. Conversely, shorts will also be holding their breath, anxiously checking after-hour prices to ensure they did not get squeezed. The fact is, the first half of this year has been difficult for most and painful for many. Stocks are down. Bonds are down. Commodities are now falling. The only asset still rising is the trade-weighted US Dollar index. We must make peace with the cyclic nature of markets, and life for that matter. Bull markets are all about letting your winners run and minimizing losses quickly. Bear markets are about capital preservation and raising cash for the next upturn. Money managers are able to outperform by not losing capital. Surprisingly, many institutional portfolio managers are actually happier during bear markets. “They get to excitedly announce their chance to buy great companies at massive discounts. A rising tide lifts all boats, but for now the tide is still going out,” writes David Keller CMT. The opening line of the poem by English writer Rudyard Kipling comes to mind: “If you can keep your head when all about you are losing theirs…”
We remain open to a wide range of possible outcomes, some better-than-expected and some worse. For now, in the words of Brian Shannon CMT, the markets are “guilty until proven innocent.” The burden of proof is on the bulls to show us that these downtrends have shifted back to uptrends. As always, thank you for reading.
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