Seasonal statistics show that the first two weeks of July tend to be bullish and that after a soft first half of the year, the second half, statistically speaking, leans towards being bullish as well.
Well, this is 2022 so a 0.74% gain in the S&P 500 index will have to suffice for bullish. This week traders and investors were subject to another series of mostly lousy news that keeps confidence at check and further dampens the overall glum mood the majority of the globe has endured through thus far in 2022.
Here are the “highlights”: The CPI came in at 9.1% versus the 8.8% estimate. The highest reading since 1981. The PPI came in at 11.3% versus the 10.7% estimate, also a 40- year high. Obviously, with inflation on every consumer’s mind, and maybe more so on the Fed’s mind, these two data inputs have become enormously important and have assumed the number one data point ex-Fed meeting announcements.
In addition, we saw the 2s-10s yield curve invert by 19 basis points this week. A traditional forebearer of recession. The Bank of Canada raised interest rates by a whopping 100 basis points on Wednesday and the Fed Fund Futures here in the US were signaling an 80% chance of a 100bps hike on the 27th (although that has plummeted to 17% after this morning’s strong economic data). The US Dollar continues to rage higher and the euro/usd cross briefly touched parity this week – adding pressure on US multinational companies. On a micro level, JP Morgan, Morgan Stanley, Fastenal, and Ericsson all reported earnings that left lots to be desired. While Citigroup, Wells Fargo, and United Health all reported respectable numbers and saw their stocks rise today.
So, is all hope lost and will the second half of 2022 pick up right where the wretched first half left off? Well, let’s take a deep breath and a step back before answering that. For one, despite all the somber news above; the S&P 500 is slightly positive in July and remains 5.1% above the lows set on June 16th.
The inflation readings this week were bad. But do they reflect the current environment? Oil is down to $97 from $120. Lumber is off 36%, Coffee is now down on 12% for the year, wheat off 37%, oats down 32%, soybeans and corn are off 10%+ from recent highs and are now down on the year. Gasoline prices have dropped for three straight weeks and recorded the biggest monthly drop so far in July since the March 2020 pandemic. Copper is down 27% on the year and aluminum is off 39%. Supply chain issues are (slowly) getting better, and lower diesel prices are aiding the trucking industry and farmers some. Shipping costs are still high, but off-peak highs.
Covid and China’s ridiculous handling of it continue to weigh on the supply chains but there is some hope the draconian measures will subside soon especially after seeing their poor economic data this week and increasingly worrisome real estate questions.
Are these dramatic drops in commodities a signal of peak inflation or a weakening global economy? We will know the answer….in about 6 months.
The jobs report on the 8th showed non-farm employment rose by 372,000 and the unemployment rate remained at 3.6% – hardly recessionary. Yields on the 10-year note are back to 2.93% – higher than a year ago but down from 3.5% and hardly reminiscent of the 1970s bloodbath.
The multiple on the S&P 500 is now down to 16x forward earnings, down from 22x. “Cheaper” for sure, but still nowhere near a historical trough.
There continue to be many unanswered questions and lots of conflicting data. Anyone searching for the “aha” moment is likely in for a long period of self-reflection. But here are some quick observations:
1) Crypto has been an unmitigated disaster this year but has digested the latest round of defaults and bankruptcies rather well. Bitcoin has displayed good support at 19k and is currently back above 20k.
2) Similarly, stocks and bonds have digested a slew of bad news and still have not made new lows on the year.
3) What if the Fed does do another 150-175bps of raising in the July/September meetings, as expected, then rests? Remember, the Eurodollar futures are pricing in cuts in 2023 4) Biotech’s, a traditional risk-on sector, continue to outperform and sport some of the only decent charts out there. A harbinger of things to come for the small caps? 5) Negative sentiment is becoming historic: Bank of America’s Bull/Bear Indicator hit zero two weeks ago. The last few times this occurred were in August 2002, July 2008, September 2011, September 2015, January 2016, and March 2020
These are admittedly some small blips in a negative wasteland, but they aren’t insignificant either. Are the bottom(s) in? Who knows? We sure don’t. There are strong cases to be made that the economy and markets have another round lower ahead of them.
But, what if we were to offer you a 16x equity market with peak inflation behind it, a Fed that is aggressive, but only for the next few months? A rate environment that is higher, but still historically very low. And throw in a consumer that has $2 trillion in savings, and the stronger than expected retail sales and consumer sentiment readings released this morning. Unemployment is still under 4% (for now), and an assortment of markets that have been thrown a kitchen sink of bad news and still aren’t making new lows.
Plus, seasonality statistics favor higher prices for the next 6 months. 70% of the time after a 20%+ pullback the returns have been positive (9 out of 13 times)
Is that something that may interest you?