September 20, 2023
Weekly Market Outlook
By Donn Goodman and Keith Schneider
First, we start off with some information on last week’s data:
Uncertainty prevailed.
We have been operating in a volatile trading range since the end of July. The rally from last October of last year (2022) had gotten overheated and was overdue for a pause and some profit taking.
From there we saw the typical 5% pullback for the overall market. Many of the stocks that led the rally saw a bigger correction than that.
Much of the reason for the enhanced volatility and the trading range has been dictated by data. Recall that the Fed Governors have been steadfastly commenting that their future decisions on potential further rate hikes would be “data dependent.” The markets have become dependent on every headline or data point that comes out, which are often interpreted quite differently by economists, analysts, and talking heads.
The stock and bond markets have been directionless as they take their immediate cues from the headline of the day. So, it bounces around, especially after earnings season, which was met with commentary (not earnings) that conveyed concern from many CEO’s about their future sales and revenue projections. While more than 75% of companies reported better than expected earnings, some of it can clearly be attributed to rising prices and inflationary measures that companies have imposed to offset raw material increases and a huge rise in transportation and delivery costs.
A week full of data and then a rally, then a selloff.
Last week, we received updated numbers on the Consumer Price Index (CPI) and the Producer Price Index (PPI), the latter being the favored indicator by the Federal Reserve.
The CPI came out last Wednesday, a week ago. The number showed the yearly Core Inflation rate continues to come down (4.3% versus 4.7%). However, some investors did flinch at the tripling of the monthly non-core rate from 0.2% to 0.6%. Surprisingly, the S&P 500 was up slightly on that headline day, but it was a risk-off session for small caps. Smaller company stocks took most of the beating of the perceived sticky inflation. It is those size companies that are penalized by interest rates staying higher longer.
Last Thursday, the PPI report showed an even more explosive 0.7% month-over-month increase. This was the sharpest increase in 14 months, driven by a 10.5% jump in energy prices (more later). That would put wholesale inflation on an 8% annualized path.
The CORE PPI number was much more subdued with a +2.2% year-over-year inflation pace, which is getting us ever closer to that 2% Fed target. This led to the belief by investors that there would most likely not be another Fed hike this year. See Producer Price Index chart below:
One would think that stocks would have cratered from that kind of data and a higher likelihood for the Fed to take further action, sooner. But instead, the market had a big rally on Thursday, helped partly by retail sales.
The nagging case of higher oil prices. (A major effect on boaters everywhere)
Just last month, prices at the pump drove inflation up faster than at any other time in a year. The consumer-price index, as referenced above, showed that prices rose 0.6% in August, with more than half of that blamed on gasoline prices that hit 10-month highs.
Oil prices are driven by both demand and supply. Global demand hit all-time highs in August. And supply remains constrained by voluntary production cuts from Saudi Arabia, OPEC, and their allies.
That’s a no-doubt-about-it path to higher prices. Not surprisingly, crude oil has jumped 8% in the last month to hit nearly $90 a barrel. See chart below:
You don’t have to be a hedge-fund manager or a Wall Street quant to know that energy stocks are surging in kind.
The broad XLE Energy Select Sector SPDR (XLE) ETF – which includes companies from the oil industry, gas and consumable fuels, and energy equipment and services – has surged more than 20% in less than four months. That’s three times the 6% gain in the S&P 500 during that same time frame.
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Business Conditions
There are plenty of negative charts and data points we could show you, but we thought we would concentrate on some of the positive signs that are leading many analysts and economists (Goldman Sachs) to lower their chances of the US entering a recession anytime soon. Let’s explore a couple of these:
Empire State Manufacturing. The index topped expectations for a modest improvement and flipped back into positive territory. The 6-month ahead outlook increased to the highest level since March 2022. See chart below:
New businesses vs. bankruptcies. “Business applications remain high (34k, vs. 25k average in 2019), and commercial bankruptcies remain low (2.3k, vs. 3.3k on average in 2019).” See chart below:
Institutional investors are increasingly bullish according to the State Street confidence indicator.
“US Equity institutional investors are no longer underweight as soft-landing expectations rise.” See chart below:
Equity fund flows. Equity funds saw their “biggest weekly inflow ($25.3bn) since Mar’22, as confidence in soft landing consensus grows.” This is further proof that individual investors are feeling more positive. See chart below:
We explore more of these economic charts, the current strike by the UAW (auto workers) and its potential damage to the US economy, and a whopper of a seasonal trade to make in the newsletter which can be accessed here:
The news flow can be confusing and intimidating, but investing in this environment doesn’t have to be. If you would like personal guidance and hands-on management of your assets with the assistance of tactical, risk managed, strategies, please contact me at donn@mgamllc.com or Keith at keith@mgamllc.com.
