Benign inflation data along with positive news on the retail front (see below) pushed stocks higher. In fact, the S&P 500 notched its best week of the year. Contrast this to a week ago Monday (Aug 11) when computer driven algorithmic trading sent stocks down four percent at the open, only to see them rally from there. As investors, it is important not to get caught up in the mechanics of the market, but rather to look through to the other side. It is also important to try to differentiate between a short-term “flash crash” and the start of something meaningful. It is not often possible so that it makes sense at those times to take a wait-and-see attitude rather than to shoot first and ask questions later. As August and September tend to be weak months, after the rally we think it wise to add meaningfully to positions in which we have the strongest conviction on weakness rather than strength.
Fed Chair Jerome Powell will deliver a speech this coming Friday at the Jackson Hole Economic Symposium sponsored by the Federal Reserve Bank of Kansas City. Historically, this has been a forum for Fed Chairs to signal changes in monetary policy and this one could be no different. Market watchers are assuming that Powell will signal an interest rate cut at their two-day meeting September 17-18. The debate is currently whether this cut will be either 0.25% or 0.50% to the Federal Funds Rate. We think it will be the former.
Thus far this year seven of the eleven Select Sector SPDR ETF’s (see below) have risen more than 10% as the S&P 500 has advanced 16.45%. This compares to 2023 when the S&P 500 rose 24.23%, but only five of the above referenced ETFs advanced more than 10%, a sign of a market that continues to broaden out. This is healthy.
According to the Federal Home Loan Mortgage Corporation (FreddieMac), “while rates increased slightly this week, they remain more than half a percent lower than the same time last year. In 2023, the 30-year fixed-rate mortgage nearly hit percent, slamming the brakes on the housing market. Now, the 30-year fixed-rate hovers around 6.5 percent and will likely trend down in the coming months as inflation continues to slow. Lower rates are good news for potential buyers and sellers alike.”
Several key pieces of Economic Data that were released this past week that may influence the Fed’s decision on interest rates at their upcoming meeting in September, including:
- Prices at the wholesale level as measured by the Producer Price Index (wholesale inflation) rose 0.1% during July, this after rising 0.2% during June. Over the past year the PPI has risen 2.2%, down from 2.6% y/y last month, and from a peak rate of 11.7% during March 2023. (Source, U.S. Bureau of Labor Statistics).
- The Consumer Price Index (retail inflation) rose 0.2% during July (2.9% y/y), after slipping 0.1% during June. The CPI has fallen from a y/y high of 9.1% during June 2022. The cost of shelter rose 0.4% during July (5.1% y/y) after rising by 0.2% in June. According to the Bureau of Labor Statistics and reported by Haver Analytics, “nearly 90% of the increase in last month’s all items CPI was due to shelter.” (Source, U.S. Bureau of Labor Statistics)
- Retail Sales surged 1.0% during July (2.7% y/y), after sliding 0.2% in June. Prices for Food at Home rose 0.1% during July, by 0.1% during June, by 0.0% during May, by 0.4% over the past six months and by 1.1% y/y. (Source, U.S. Census Bureau)
- Housing Starts slumped 6.8% or by 91,000 to a seasonally-adjusted annualized rate (SAAR) of 1,238,000 during July, as compared to 1,329,000 in June (-16.0% y/y). During July, Single-family housing starts cratered 14.1% or 140,000 to 851,000 from 991 million (-14.8% y/y). Meanwhile Multifamily housing starts rose 11.7% to 363,000 in July from 363,000 during June (-21.8% y/y). Building Permits, a key barometer of future starts, fell 4.0% or 58,000 to 1,396,000 in July from 1,454,000 (-7.0% y/y) and in doing so market a four year low. (Source, U.S. Census Bureau)
- The University of Michigan reported that the Preliminary August Reading of Consumer Sentiment rose to 67.8 from a final July 66.4 as well as from a preliminary July 66.0. The preliminary August expectations component rose to 72.1 from a final July 68.8 and from a preliminary July 67.2. Lastly, the preliminary August current conditions component fell to 60.9 from a final July 62.7 and from a preliminary July 64.1.
Companies in the Headlines
Walmart (WMT) revenue as well as earnings surpassed consensus estimates as the discounter also projected sales to rise between 3.75% and 4.75% for the year. Importantly, Chief Financial Officer (CFO) John Davis Rainey stated during an interview that “we see, among our members and customers, that they remain choiceful, discerning, value-seeking, focusing on things like essentials rather than discretionary items, but importantly, we don’t see any additional fraying of consumer health.”
Conversely, despite beating on both revenue and earnings estimates, Home Depot (HD) CFO Richard McPhail noted that “pros tell us that, for the first time, their customers aren’t just deferring because of higher financing costs. They’re deferring because of a sense of greater uncertainty in the economy.” We also believe they may now be deferring as interest rates are declining.
The board of Starbucks (SBUX) ousted CEO Laxman Narsimhan, effective immediately, replacing him with Chipotle (CMG) CEO Brian Niccol, causing shares of SBUX to surge and those of CMG to pull back. Prior to this announcement shares of the coffee giant have recently languished while those of the burrito maker have surged. We believe that Niccol has his work cut out for him and that CMG merits a look on this pullback.
Upcoming Economic Reports scheduled to be released this week include the following, on Monday, July Index of Leading Economic Indicators (LEI) from The Conference Board; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, and July Existing Home Sales; and, on Friday, July Sales of New Homes.
The Q2 Earnings Season continues to roll along. Companies of note scheduled to report this week, include – Palo Alto Networks (PANW), Estee Lauder (EL), Medtronic (MDT), Lowe’s (LOW), Snowflake (SNOW), Target (TGT), TJX (TJX), Analog Devices (ADI), Synopsys (SNPS), PDD Holdings (PDD), Intuit (INTU), Ross Stores (ROST), Workday (WDAY) and NetEase (NTES).
General Disclosure: “This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
