Caution: Don’t Be Fooled By The Stock Market
• We are concerned about the direction that company earnings will take. We’re seeing a shift in consumer spending and a stalling restart, which is partly why we remain cautious about equities.
• Stocks rose on the news that the Federal Reserve might cut interest rates soon, as inflation converges. We believe it’s premature and that inflation will settle in excess of Pre-Covid levels.
•The sluggishness in the U.S. economy may be reflected in its activity data. CPI in the United Kingdom is set to continue its ascent due to rising energy prices.
I do not think the stock market rally will last because we expect the Fed to raise rates again soon, which could stall the economic restart. Additionally, corporate earnings may weaken as consumers spending changes and profit margins contract. Consumers are changing their spending habits from goods to services. This business cycle is unusual so there will be different impacts in various regions and sectors. One of the risks involved with stocks right now is that earnings could end up being disappointing, which is why we are tactically underweight stocks at this time.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
- Tuesday – New housing sales
- Friday – Personal Income
- Friday – Personal Spending
- Friday – PCE Prices
- Friday – PCE Prices Core
Personal Consumption Expenditures is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. The Federal Reserve uses PCE mor than CPI with looking at inflation.
Global Spotlight
One of Ukraine’s most important national holidays is its independence day, which it observed on Aug. 24. This year, the date will not be a national holiday, and some celebrations like the annual military parade in Kyiv have been cancelled. The Ukrainian military has expressed concerns that Russia could launch large missile attacks across Ukraine or on Kyiv with weapons it has been stockpiling in Belarus. Ukraine’s military, on the other hand, might strike deep into Russia or even inside Russia to boost morale and provide further motivation for the celebration.
Angola has a presidential election. Joao Lourenco, the president of the People’s Movement for the Liberation of Angola (MPLA), will compete against Adalberto Costa Junior, leader of the National Union for the Total Independence of Angola (UNITA) on August 24. The People’s Movement for the Liberation of Angola, or MPLA, has ruled Angola for decades, but growing frustrations over poverty, police brutality, and political censorship have caused more people to back UNITA in recent years.
The following key eurozone economic data will be released the week of Aug. 21, giving individuals a sense of where Europe’s economy is headed for the rest of summer. The purchasing managers index (PMI) for the eurozone is a key metric that investors watch in order to gauge the health of Europe’s economy. In July, the PMI dipped below 50, indicating that economic activity was contracting. The August PMIs will reveal how European economies are coping with even more difficult operating conditions.
South Korea and the United States conduct military drills. South Korean and American forces on Aug. 22 will begin the so-called Ulchi Freedom Shield military drills in South Korea involving about 10,000 U.S. troops and up to 200,000 South Korean soldiers.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review Last weeks numbers here.
Earnings
- 22Q2 Y/Y earnings are expected to be 8.8%. Excluding the energy sector, the Y/Y earnings estimate is -1.8%.
- Of the 474 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.8% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%.
- During the week of Aug. 22, 12 S&P 500 companies are expected to report quarterly earnings.
Earnings season is in full swing, and as companies report their results, it’s becoming clear that the slowdown in the global economy is taking its toll.
Source I/B/E/S data from Refinitiv
Macro Market
The Federal Reserve is in denial that getting inflation down to target too quickly would have a negative effect on growth and jobs. According to its most recent estimates, inflation will come down and the economy will return (almost) to the growth path it was on pre-pandemic.
We only see this happening if production capacity fully bounces back by the end of 2020, which is an unlikely scenario. We think the Fed will understand later on this year that they have done more harm than good with their current actions. As a result, early next year should bring about a change in course for them.
Why? The Fed may conclude that production capacity will be restricted for some time, and that only a severe recession can bring inflation down entirely. We anticipate it to choose to live with more persistent inflation to avoid it.
In our opinion, the conclusion is that the Fed will not cause the type of recession necessary to reduce inflation. That implies we’ll be dealing with inflation greater than 2% for some time to come.
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