The Week Behind

Courtesy of Friday’s sell-off on the backs of MU and AAPL, all the major indices closed the week in the red. DOW down 0.9%; NASDAQ down 1.0%; S&P down ~1.2%.

Highlights:

• Jamie Dimon appeared to have flip-flopped as the CEO turned weather forecaster called for anything from a category 1 hurricane to a “superstorm Sandy” after proclaiming the clouds were clearing the week before.
• Markets grappled with the 10-year retesting 3%. 
• Indices reacted poorly to PMI, but positively to mixed employment data.
• The Chinese economy began reopening.
• Microsoft (MSFT) revised earnings downward as a strong U.S. dollar weighs on multinationals (FX revision). 
• Bearish calls on Micron (MU) and Apple (AAPL) as DRAM prices appear to be deflating, and Apple’s app store is suffering due to slowdowns in China.

Although Friday’s session was poor, overall, the market continued its recent trend of ending up despite bad news. On Wednesday, we traded down as QT began, sending the 10 year close to 3%, and May PMI came out to 56.1%, suggesting the economy may still be hot enough to warrant additional FED tightening. However, the indices recovered pretty well by the close. On Thursday, it was MSFT’s downward FX revision and FED Vice Chair Brainard reiterating her hawkish position that caused an AM sell-off. However, by midday a bounce was underway that had enough energy for all three of the major indices to close convincingly at weekly highs. Friday, downgrades to AAPL and MU resulted in a down open without a bounce. However, the major indices refused to give back gains made in the prior week’s rally. In short, while the indices did not stage a bounce to close the week, the indices showed some resilience by refusing to fold. 

Is The Rally Intact?

In my view, the rally is still intact, but there now arise fair questions surrounding how much steam remains. With the 10 year below 3%, S&P holding 4,100, plenty of bad news priced in, and earnings holding up, I think there is more room for upside. Furthermore, it appears that the 10-year yield and investor appetite are largely dependent on the FED’s tightening path. Assuming the FED doesn’t deviate from its planned 50 bps hikes at the next two meetings, I think the market is range bound pending data relative to the FED’s action in September. Do we see a 25, 50, or 75bp hike? Do we see additional reduction of the balance sheet? Economic indicators, bellwether earning reports, and “FED Speak” is our best source of additional insight. Given year-over-year comps for CPI get easier for the latter half of the year, there is reason to believe the FED will have some leeway to slow tightening, which is bullish for equities.    

The Week Ahead

Speaking of economic indicators, this week features consumer credit – 3pm, Tuesday – initial and continuing jobless claims – 8:30am, Thursday – and CPI – 8:30am, Friday. Consumer credit will provide insight on how households are handling elevated levels of food and energy inflation. A poor reading may create the perception the FED will remain aggressive in September. It would also give reason to sell consumer discretionary. As per jobs, we want a middle-of-the-road number. Too hot, the FED needs to do more to slow the economy. Too cool, the economy is falling into more than a slowdown. CPI, we want a cool core and headline to permit less aggressive action in September. 

As per earnings, Dave and Buster’s (PLAY) reports Tuesday after the bell. A good number would suggest consumers are spending on “experiences”. Campbell (CPB) reports Wednesday before the open. It is considered a safe-haven in the current environment and part of an exclusive club of stocks that are positive YTD. Otherwise, Thursday after the bell is DocuSign (DOCU). The stock has been cut in half YTD. I think this company has legs post-COVID; however, it will need to deliver a compelling post-pandemic plan or commentary to change its perception as a pandemic-darling. 

As previously mentioned, I think the market’s primary concern is FED action in September. Remember, the FED promised to be data dependent beyond the June and July meetings. The FED’s move in September is dependent on the health of the economy and state of inflation as illustrated through all of the data leading up to September’s meeting. While this week’s data is important, it only begins to set the table for the FED’s next move. Most simply, the FED will not be making final decisions on September based on this week’s data. I issue this reminder because the market will react in the moment, and you can expect FED members to do the same via interviews and press releases. Don’t let an extreme response from either cause you to make an emotional decision with your portfolio.