Did you make it through the July 4th financial storm of 2023? A week back, the ADP jobs report crushed expectations and had investors everywhere biting their nails, but remember, good things take time. They feared the Federal Reserve might speed up hiking interest rates and wreck the market rally. If you consider a 1% drop over two days a disaster, then that ADP shocker did upset the rally. But here’s the good news – we’re one week later, and all those losses are history. Major U.S. stock indices are right around their recent bull market highs, with solid gains throughout the week.
Now that the significant inflation reports are out, investors will turn their eyes to company earnings. The major banks started the show at the end of the week, and the results have been solid, just like the inflation data earlier in the week. On Friday alone, all seven of the companies reporting topped EPS forecasts, and five out of seven exceeded revenue estimates. For the entire week, 14 of the 15 companies reporting topped EPS forecasts, with two-thirds topping revenue estimates.
If you’re a bull, you really couldn’t have asked for a better run of events this week. Everything came up roses, whether it was inflation data, jobless claims, market breadth, or James Bullard (one of the most hawkish members of the FOMC) announcing he is stepping down from his position as president of the St. Louis Federal Reserve. Even our three flights last week had no delays, with each one arriving 30 minutes early. Maybe it’s time to take a shot at the Powerball ($875M) and MegaMillions ($560M) this weekend!
But let’s not get ahead of ourselves. As great as this week felt, remember that performance tends to improve when it seems things can’t go right for the market. Likewise, when things seemingly can’t go wrong, things have a way of popping up out of the blue. To say that folks are feeling more bullish this week would be putting it mildly. Inflation data is certainly looking up, but the easy comparisons are over. And while earnings season kicked off with a bang, we still have thousands of companies left to report. Plus, it’s not like expectations for the financial sector were sky-high.
Don’t get us wrong; we’re not saying things look bad. There are still plenty of reasons to be optimistic about the second half of the year, but let’s not assume the rest of the year is going to be a cakewalk. Healthy bull markets know how to keep investors from getting too hyped, so expect some bumps along the way. Just as it was wrong to freak out over one “bad” report last week, it’s not smart to get overexcited about the market based on one good week of trading.
We’ll quickly turn to Wednesday’s CPI release, as it was easily the most critical piece of news this week. CPI came in weaker than expected on both the headline and core levels. The most notable aspect of the report was that core CPI plunged below 2% on a MoM annualized pace, the slowest rate since February 2021, which is a rate consistent with pre-pandemic levels. Moreover, food price increases are finally slowing, as the ‘Food at home’ category was negative MoM, with egg prices now down -35% from January of this year. Lastly, the stubbornly high shelter component continues to keep overall core CPI elevated; however, the trend is moving in the right direction, as the MoM annualized increase finally dropped below 6% in June.
Economy
- U.S. equity markets returned to their winning ways, with the S&P 500 up +2.4%, the Nasdaq up +3.3%, and the small-cap Russell 2000 up +3.6%. The week’s biggest news was that CPI was down to 3% year-over-year, now six percentage points from last year’s peak.
- The annual inflation rate in the U.S. slowed to 3% in June, the lowest since March 2021, compared to 4% in May and expectations of 3.1%. The slowdown is partly due to a high base effect from last year when a surge in energy and food prices pushed the headline inflation rate to 1981-highs of 9.1%.
- The annual core CPI rate in the United States, which excludes volatile items such as food and energy, fell to 4.8% in June, the lowest since October 2021, down from 5.3% the prior month and below market expectations of 5%.
- Producer prices for final demand in the U.S. edged up 0.1% MoM in June, following a decline of -0.4% in May, and below market forecasts of a 0.2% rise. Services costs went up 0.2%, the same as in May.
- The number of Americans filing for unemployment benefits fell by 12K from the prior week to 237K on the week ending July 8th, sharply below market expectations of 250K. The result aligned with recent data underscoring a stubbornly tight labor market in the United States.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Communication Services were the top performers, while Energy and Consumer Staples lagged. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 23 basis points to 3.81% during the week.
- Global bond markets were in positive territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
