Market Recap Week Ending July 16
The week in review…Dow (185) or (0.53%), the Nasdaq (275) or (1.87%) and the S&P (42) or (0.96%). Fear and greed and greed and fear. The focus of the market’s concern flipped again this week with the shockingly large CPI report on Tuesday refocusing investor’s fears of inflation. Despite testimony from Fed Chair Powell that he still believes pricing pressures are transitory, he did admit that the strength of the numbers has surprised him. The “curiouser and curiouser” issue is the state of the 10-year U.S. treasury yield which broke below the 1.30% level on Thursday and just finished at that level on Friday. Ostensibly, with inflation fears, the 10-year yield should be pushing the 2% level but since peaking at 1.75% in February, has receded 45 basis points. Some market observers are blaming too much liquidity in the system and strong demand from foreign investors, however there could be a more nefarious factor, the Covid-19 Delta variant. The U.S. seven-day average of new infections has risen 67% week over week to 26,448 new cases with the unvaccinated population (and those children under 12, ineligible for the vaccines) being almost exclusively affected by the variant. This surge could be causing a “flight to safety” (said when investors flee riskier assets to buy more conservative Treasury notes) as investors expect further economic disruption…After a great appetizer of earnings this week, which were on balance, very very good, next week the calendar explodes with companies reporting Q2 numbers. Anything short of beating top and bottom lines and raising guidance for the year, will be considered a disappointment….
What we are watching next week…
Monday – Reporting: IBM (IBM).
Tuesday – Reporting: Netflix (NFLX), Chipotle (CMG), UBS (UBS).ds
Wednesday – Johnson and Johnson (JNJ), Coca-Cola (KO), Verizon (VZ), Harley-Davidson (HOG).
Thursday – Initial Jobless Claims. Reporting: Intel (INTC), AT&T (T), Snap (SNAP).
Friday – Manufacturing and Services PMI. Reporting: American Express (AXP).
Last week’s trading…
Monday – Dow +126 to 34,998 (record close), the Nasdaq +31 to 14,733 (record close) and the S&P +15 to 4,384 (record close). All three indices notched new record highs as we begin Q2 earnings season. The U.S. 10 –year Treasury yield gained back a few of the basis points that it gave up last week, nudging up 2 bp to 1.377%. Nine of the eleven S&P sectors were positive today with the cyclical, value plays retaking leadership (Materials and Financials). Meanwhile, Energy and Consumer Staples traded down on the day. The banks kick off earnings season tomorrow.
Tuesday – Dow (107) to 34,888, the Nasdaq (55) to 14,677, and the S&P (15) to 4,369. Blowout numbers from JP Morgan Chase (JPM) and Goldman Sachs (GS) were not enough to overcome a historically high inflation print which dragged down all three indices today. Eight of the eleven S&P sectors traded down with only Consumer Discretionary, Technology, and Industrials finishing in the green. The 10-year Treasury yield reacted to the sharp move in the CPI, trading up 4 bp to break the 1.4% barrier and settling in at nearly 1.42%. The June CPI number increased 5.4% year over year vs expectations of 5% and Core CPI which excludes the more volatile sectors of food and energy increased 4.5% vs expectations of a 3.8% jump. San Francisco Fed President Mary Daly continued the Fed’s mantra that pricing pressures are temporary. Used car prices continue to be a large part of the increase in the overall CPI number and that situation is not expected to endure…The market appears to be “priced to perfection” and even perfection may not be enough. JPM beat their earnings numbers by 15% and traded down 2.72%. However, much of that outperformance was driven by bad loan reserves, which were set aside but not needed during the pandemic and are now being returned to the balance sheet and boosting numbers. As such, the Street may discount big bank earnings that appear on the surface to be superlative. This will be something to watch the rest of the week as the other big banks report… Goldman Sachs beat their earnings numbers by approximately 50% on investment banking profits and still traded down 1.19% today…PepsiCo (PEP) crushed their numbers and traded up 2.3%…More trouble for Boeing (BA), the beleaguered air and space manufacturer announced production cuts of their 787 Dreamliner due to the discovery of a new flaw and traded down 4.23%…
Wednesday – Dow +44 to 34,933, the Nasdaq (32) to 14,644, and the S&P +5 to 4,374. The market largely shrugged off the explosive inflation report from yesterday and took back some of the previous day’s losses. The lack of follow through selling was aided no doubt in part to Fed Chairman Powell’s assurances to Congress that the Fed’s goals of “substantial further progress” in employment and inflation have yet to be achieved. The U.S. 10-year Treasury yield agreed and traded down 9 bp to 1.33%. Only five of the eleven S&P sectors traded higher with Consumer Staples and Real Estate leading the winners. The worst performers were Energy and Consumer Discretionary…Wells Fargo (WFC) crushed their numbers but like JPM, the beat was ascribable to the return to the balance sheet of funds set aside for loan losses during the pandemic. Despite that, WFC traded up nearly 4% on their numbers…Bank of America (BAC) missed numbers due to lower interest rates and depressed trading volumes on their fixed income desk. BAC traded down 2.51%…Citigroup (C) beat their numbers across the board and traded down 0.29%.
Thursday – Dow +53 to 34,986, the Nasdaq (102) to 14,542, and the S&P (15) to 4,359. Jobless claims printed a 360,000 number, matching expectations, and a decline from last week’s upwardly revised 386,000 print. The Empire State index exploded to a record 43 vs expectations of 17.3. Any reading above zero indicates improving conditions. The Philly Fed fell to 21.9 from 30.7 in June but remained at elevated levels. Both numbers highlighted that manufacturing continues to be strong but that supply shortages and logistics remain challenging…United Health (UNH) reported and beat numbers easily…Alcoa (AA), beat numbers for the fourth consecutive quarter and is now up 52.5% YTD….
Friday – Dow (299) to 34,687, the Nasdaq (115) to 14,427, and the S&P (32) to 4,327. June Retail Sales was gangbusters, up 0.6% vs expectations of a 0.4% decline. Unfortunately, that disturbed the fragile equilibrium between fear of inflation vs fear of lackluster growth with the former winning out. All three indices closed in the red taking seven of the eleven S&P sectors with them. Energy and Materials were the two worst performers while the defensive sectors of Health Care and Utilities were the best sectors today…Oddly enough, the U.S. 10-year Treasury did not confirm the fears of the market, trading relatively unchanged at 1.30%.
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Disclaimer: This is not a recommendation to either buy or sell any of the securities listed above. The author personally owns, or controls a family member’s account which owns, the following…Bitcoin (coin), Cardano (coin), Chainlink (coin), Ethereum (coin), ETHE, GBTC, and TSLA.