Steady Market Resilience: Boring is Beautiful

Thoughts

• Equity markets continued their period of consolidation, extending the losing streak to three weeks, as overbought conditions, poor seasonality, and rising interest rates caused a stall. Interest rates are the latest source of consternation, with the 10-year rate hitting a cycle high, briefly topping 4.30% for the first time since 2007, while the real 10-year yield is at a 15-year high. The Bloomberg US Aggregate Bond Index is now negative for the year, setting the stage for the third-straight negative year for the first time in the Index’s 50-year history.
• Shifts in sentiment have been a primary driver of market action this year. The CNN Fear & Greed Index combines seven technical indicators, including breadth, sentiment, and risk metrics. This index hit a low of 14 (on a scale from 0-100) last September and ended the year at 34, reflecting excessive pessimism. This saw a dramatic rebound this year, peaking at 82 in late July, before plummeting to 42 on Friday. This rising fear is reflected in fund flows, with $925 billion into money market funds this year already surpassing the record from 2020. This is consistent with Goldman Sacks and JPMorgan data showing incrementally conservative positioning among hedge funds, mutual funds, and algorithmic traders.
• Although last week was the third straight negative week for the S&P 500® Index, we are still not seeing the painful, emotional market reactions that have historically occurred at a time like this. However, the Jackson Hole meeting this Friday is the next hurdle for the market to jump over to prove that we haven’t returned to emotional days. While last year’s speech from Chairman Powell caused a strong market reaction, it is possible that reactions to his speech this year may reinforce the idea of a slow and steady market instead. Boring is beautiful this week.

News

• Retail earnings reiterated the fact that the consumer continues to spend, with Walmart, Target, and Home Depot all reporting upside to earnings for the quarter ending in July. “Jobs, wages, and pockets of disinflation are helping our customers,” Walmart Chief Executive Officer Doug McMillon said, “but rising energy prices, resuming student loan payments, higher borrowing costs, and tightening lending standards — and a drawdown in excess savings — mean that household budgets are still under pressure.” Target’s prospects were more challenged, with the largest drop in sales in nearly seven years, driven by apparel, home goods, and electronics. This tone is consistent with the caution expressed for most of the past year, though the consumer has continually surprised to the upside. Retail sales jumped 0.7% in July, roughly double the estimate and the result from June, registering the best growth since January on broad strength.
• The Atlanta Fed’s GDPNow model made headlines this week with a revision to the model that now forecasts growth of 5.8% in the third quarter. This is up from 4.1% last week, and compares with the consensus estimate of 1.7%, and 2.4% in the second quarter. The current consensus of economists is for a negative result in the fourth quarter and a recession in 2024. The revision to the Atlanta Fed’s model was driven primarily by stronger-than-expected consumer spending on goods and services, along with industrial production and housing. The strength of the consumer will be tested in coming months with the resumption of student loan payments, with a Credit Karma survey showing that over half of borrowers say they will be forced to choose between making their loan payment or covering necessities, like rent and groceries. KeyBanc has said it believes resumption has the potential to reduce retail sales by as much as 2%. Bank of America disagrees, however, noting that forbearance comprises just 0.2% of total disposable income.
• Supply chain disruptions have been a constant headwind for the economy since the pandemic began, with multiple factors potentially causing a rebound. Major shipping lanes are being impacted by El Niño, with delays at the Panama Canal caused by low water levels. Low water levels in Europe are also a source of concern. Beyond weather, labor availability and cost are headwinds for transportation. UPS recently avoided the strike of 340,000 workers, though the deal was costly. The United Auto Workers are threatening to go on strike when their contract expires on September 14.

What to Watch

• Fed Chair Powell’s Jackson Hole speech this Friday will be the primary focus of investors to gauge the next move by the Fed. Economic data includes existing home sales on Tuesday, PMI and new home sale data on Wednesday, durable goods on Thursday, and consumer sentiment on Friday.