The Safe Investing Blog

Stock Market Outlook entering the Week of August 28th = Uptrend

• • ADX Directional Indicators: Downtrend
  • Price & Volume Action: Uptrend
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook retains the uptrend designation, but signal strength weakened after Friday’s sell-off.

The S&P500 ($SPX) fell 4%, with most of that damage occurring after Fed Chair Powell’s comments on Friday morning.  Earlier in the week, the index fell back into the support/resistance battleground that’s been with us since late February and early March.  The SPX enters the week just above its 50-day moving average.

SPX Price & Volume Chart for the Week of August 28 2022

The ADX directional indicators flipped on Friday, moving this signal to a downtrend. Price & volume remains in an uptrend, thanks to the low number of distribution days.  Leading stocks (e.g. IBD Innovator 50 $FFTY) held up well all things considered.  Watch for high volume down days, especially those that cut through the 50-day.

SPX Elliott Wave Analysis for the Week of August 28 2022

Elliott Wave is still mixed.  Bearish viewpoints gained popularity last week, as did the number of possible wave counts.  In all bearish cases, the SPX is in the first wave of a new downtrend.  Some bearish counts appear to support a bullish view as they unfold, which is the reason this signal is still mixed.  A bullish view remains intact as long as the current down wave (Minor 4) doesn’t drop below 3,946 (Minor 1 high).  That said, I’d expect the SPX to stay below 4367 if the bear market rally is over.

COMMENTARY
The call for choppy price action was spot on, and volatility spiked last week.  The SPX’s volatility index ($VIX) gapped up last Monday and closed out the week near 26.  That’s right in the middle of Hedgeye’s “chop bucket” (i.e. 20-30), where the market tends to gap down sporadically.

Expanding the view to other indexes, we can see even higher levels of volatility (i.e. risk).  Both the Nasdaq and Russell 2000 have their own volatility indexes (i.e. $VXN and $RVX, respectively).

The $VXN and $RVX ended the week above 30. A reading above 30 is affectionately referred to as the “F bucket” by Hedgeye, and means there’s a high probability of sell-offs…big ones.  Keep that in mind when evaluating new trades or existing holdings.

Friday’s surge in volatility was a response to Fed Chair Powell’s press conference.  The size and scale of the sell-off confirms market participants expected “dovish” remarks, which were nowhere to be found.

By dovish, I mean expecting a statement like “as indicated by flattening CPI and PPI data, our aggressive rate hikes have begun to reign in inflation, and this dynamic will play an important role in upcoming rate adjustments”.  A statement like this would support the “rate hikes will slow down and turn into rate cuts sometime in 2023” narrative that led markets higher in July and August.

Instead, the hawks were out:

The Fed is committed to raising and maintaining interest rates. Period. GDP slows?  Meh.  Unemployment rises?  An unfortunate, but unavoidable, side effect of getting inflation under control.

As inflation improves, expect the narrative to change.  CPI and PPI will remain important talking points, but expect to hear more about Personal Consumption Expenditures (called the “PCE”).

The PCE Index dropped in July, from 6.8% to 6.3% versus a year ago. Core PCE, which excludes food and energy, came in at 4.6%.  The Fed uses Core PCE data as its primary inflation gauge.  Bullish commentators are likely to reference this number to justify their case for fewer rate hikes and end of year price targets, since it’s close to the Fed’s 2% goal.

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Sources: Bloomberg, CNBC, Hedgeye, US Bureau of Economic Analysis

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of August 21st = Uptrend

• • ADX Directional Indicators: Uptrend
  • Price & Volume Action: Uptrend
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook uptrend continues into its 5th week, even though the SPX met resistance at a key indicator for technical analysts.

For the week, the S&P500 ($SPX) fell 1.2%, after failing to break through the 200-day moving average on Tuesday.

SPX Price & Volume Chart for the Week of August 21 2022

The ADX remains bullish and price/volume actions shows the index above the 50-day moving average with a low number of distribution days. The trend of lower trading volume continues.

SPX Elliott Wave Analysis for the Week of August 21 2022

Elliott Wave is unchanged from last week, other than the fact that the index moved from an up-wave to a down-wave. If the rally is complete (Wave C complete), Tuesday’s high was the top. If the rally isn’t over (Wave 3 complete), the index could drop as far as the late June high (~3950) before heading higher again.

COMMENTARY
Fed minutes were released last week, but amounted to a nothing burger. Some market participants reacted were surprised by the hawkish tone. But those were the same people that assumed the words “neutral rate” meant the Fed was pivoting to rate cuts.  Look for more slicing and dicing of Fed comments coming out of the Jackson Hole Economic Symposium this week.

The retail sales report hit the wires too. Overall spending in July remained unchanged from June, similar to the CPI report 2 weeks ago. Housing data showed declines in the residential market (housing starts, permits, and mortgage applications), which supports recession narratives.

Friday’s weekly & option expiration covered ~$2.1 trillion, which would be a lot for a quarterly expiration date, let alone a monthly one like August. Then again, maybe it’s not surprising. If you’ve been watching stocks with high levels of short-interest, you know people are still gambling on short squeezes ($BBBY or $WEBR anyone?). Goldman Sach’s “Most Short Basket” of stocks was up a whopping +21% in the first two weeks of August alone!

I expect trading volume to pick up over the next few weeks as summer holiday’s come to a close and institutional trading desks get back to work. Quantitative tightening, rate hikes, and poor hedge fund performance will make for a challenging trading environment over the next few weeks, not to mention Q4.

The volatility index for the SPX ($VIX) is trading just above 20, after bottoming out around 19 last week.  A $VIX reading between 20 and 30 is called the “chop” bucket by risk-management firm Hedgeye, because price action is uneven or “choppy” between those levels, leading to traders getting chopped up.

Back in late March & early April, the VIX was near a similar level, and the SPX took ~2.5 weeks of that back-and-forth market action to drop 5% (local high point to the 50-day moving average).  With SPX is currently ~6.5% above the 50-day, there’s a high probability we see a choppy sell-off over the next few weeks…without any change the signals shift to a downtrend.

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Sources: Bloomberg, CNBC, Hedgeye, U.S. Bureau of Labor Statistics

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of August 14th = Uptrend

• • ADX Directional Indicators: Uptrend
  • Price & Volume Action: Uptrend
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook uptrend continues into its 4th week, with the SPX breaking through overhead resistance and ~10% from break-even, year to date.

The S&P500 ($SPX) rose 3.3% for the week, and sits just below the 200-day moving average, a key psychological indicator for technical analysts.  As of Friday’s close, the index has rallied ~18% from the June low, which is average for a bear market rally over the past 20 years (I saw that stat last week, but can’t find the source).

SPX Price & Volume Chart for the Week of August 14 2022

All three signals remain unchanged. The ADX and price/volume show bullish price action.  The biggest caveat is the lack of trading volume, but that’s not uncommon during the summer months.

Elliott Wave is still mixed, while we await to completion of the current wave, which appears to have extended.  So far, it retraced a little more than 50% of the entire bear market.

SPX Elliott Wave Analysis for the Week of August 14 2022

COMMENTARY
A lot of U.S. inflation data to sift through last week, but overall the numbers show movement in the right direction.  Both consumer and producer prices retreated during July, thanks to a drop in energy prices (mainly oil and gas), confirming inflation reached a peak in June.  I say “a” peak, rather than “the” peak, because a spike in oil price likely sends inflation back up.

CPI was +8.5% year over year, versus expectations of 8.7% and a bit lower the last month’s 9.1% increase. The month over month reading was unchanged from June, leading some to say the U.S. experienced zero inflation in July. A classic half truth, but I digress.

Core inflation was 5.9% year-over-year, which was a welcome surprise to the downside (6.1% was the expectation). Bottom line, CPI didn’t get worse last month, mainly because gasoline prices declined 7%.

PPI data showed a +9.8% increase year-over-year, versus an expectation of 10.4%. Like CPI, the reading was below the June number of 11.3% and benefiting from the lower energy prices. Core PPI was 7.6%, below the expectation of 7.8%.

Along with the lower inflation readings came new expectations of smaller rate hikes for the rest of the year.  Before everyone gets carried away, year-over-year inflation is still rising.  Even if August, September, October, and November M-o-M readings showed no change, the Y-o-Y CPI in December would STILL be show a 6.5% increase (3x the long term target of 2%).

Even if we had zero additional inflation for the rest of the year, CPI would not reach Fed’s 2% target (applying pre- or post-COVID averages brings it down much less) @biancoresearch @BLS_gov @ClevelandFed pic.twitter.com/pPi8gKZG8T

—
Liz Ann Sonders (@LizAnnSonders) August 11, 2022

The Inflation Reduction Act was passed, but it’s light on inflation reduction and heavy on stimulus.  There’s a lot of investment and subsidies in the bill, which is inflationary, even if it’s also good strategically/geopolitically.  The higher corporate taxes and buyback fees will increase corporate expenses and lower profits, and that should lower job and wage growth, which should eventually lower inflation.  The bill IS projected to reduce the federal deficit, so calling it the Deficit Reduction Act is more accurate, but I digress…again.

Q2 earnings season is winding down, and for the most part, earnings beat expectations. Those expectations were double-digit percentages lower verses a year ago, but that didn’t matter much to investors as they piled back into the market.  I even heard a narrative that  a recession won’t be as bad as feared, because earnings season was so strong! Of course, the same people were adjusting the rule-of-thumb definition of a recession two weeks ago, in order to say the U.S. wasn’t in a recession…

Bull or bear, let price be your guide.  The signals tracked here have been bullish for a few weeks, and long-only investors probably have a nice recovery in their stock holdings.  It’s a great time to review your holdings and take profits if you have them.  Or reduce your level of risk if the March and/or May drawdowns kept you up at night!

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Sources: Bloomberg, CNBC, Hedgeye, U.S. Bureau of Labor Statistics

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of August 7th = Uptrend

• • ADX Directional Indicators: Uptrend
  • Price & Volume Action: Uptrend
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook enters week 3 of the current uptrend, but failed to make much progress last week.

The S&P500 ($SPX) got caught in highlighted resistance band, sandwiched between the lows of March and the highs of early June.  For the week, the index rose 0.4%.

SPX Price & Volume Chart for the Week of August 07 2022

All three signals remain unchanged. The ADX shows strengthening bullish price action, but the overall reading isn’t high enough to say the trend is “strong”/

Price/volume shows an uptrend in place.  Trading volumes were below average, but there’s not much in the way of institutional selling either.

SPX Elliott Wave Analysis for the Week of August 07 2022

Elliott Wave remains mixed. We don’t know if it’s the 5th wave in a bullish count (3rd wave of an uptrend) or a bearish count (completed C-wave). An RSI divergence developed, supporting a completed 5th wave in either case.  But the index rose above the target price range for the bearish “flat” pattern.   See the end of the post for weekly and monthly views.

COMMENTARY
As of Friday morning, 87% of the SP500 had reported earnings; average revenue is up 15% year over year, and earnings are up 9%.  Those are better than the aggregate numbers mentioned last weekend, when 50% of the index had reported.  The data shows that overall, companies overcame macro headwinds and challenging year-over-year comparisons.

Source: Hedgeye Risk Management

That said, a large portion of the overall improvement came from the energy sector (22 of 23 companies reporting), which averaged a 77% increase in revenue and a 308% increase in earnings!  That skews the average a bit, and masks weakness in other sectors of the economy (Financials, Communications, Consumer Discretionary, etc.).

On Friday, we found out that the U.S. economy added 528,000 jobs in August.  That’s more than double estimates for and increase of 258,000 jobs, which means we’ve recovered all the jobs lost during COVID-19 shutdowns (in aggregate).  That puts the U.S. unemployment rate back to a pre-pandemic level of 3.5%.

From an employment standpoint, that’s great news.  Unfortunately, that means the Fed has a green light to continue hiking rates.

Think about it.  The Fed’s so-called “dual mandate” is low inflation and full employment.  Right now, they’re on a mission to reduce inflation ~9% to 2% as fast as possible with as little as possible unemployment (the “soft landing”).  After “big” rate hikes and QT, we see signs that inflation is just starting to ease, but unemployment is at all time lows.  To me, that seems like the all clear to continue aggressive rate hikes, not take them off the table.

That would be an issue for all those CNBC narratives saying markets rallied because inflation has peaked and therefore so have interest rate hikes.

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Sources: Bloomberg, CNBC, Hedgeye

P.S.S. Weekly / Monthly Elliott Wave Charts

SPX Elliott Wave Analysis for the Week of August 07 2022

In a weekly view, we see the SPX retracing a bit less than 50% from the January high to the June low. If the March 2020 low was the start of a new bull market (i.e. Cycle III wave, which is not the count shown above), then it’s possible that the 2nd wave correction is complete. I don’t see too many people that bullish on stocks at this point.

SPX Elliott Wave Analysis for the Week of August 07 2022

Going out even further, we see the SPX gained 4151 points from the 2009 market bottom (667) to the 2022 market to (4818), for a gain of 622% (Cycle I wave)!  At the June low of 3637, the SPX retraced 28% of the total bull run. As of Friday, the closed at 4145, which is a 16% retracement of the total bull run. Neither of those retracements would satisfy a Cycle II corrective wave, lending support to the view that the bear market isn’t over.

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of July 31st = Uptrend

• • ADX Directional Indicators: Uptrend
  • Price & Volume Action: Uptrend
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook kicks off week 2 of an uptrend, as stocks went risk-on despite an interest rate hike, negative GDP print, and continued earnings deceleration.

The S&P500 ($SPX) found support at the 50-day moving average Tuesday, closing the week up 4.3%. The index is back near highs of early June, or lows of March, whichever you prefer.  Either way, that zone creates a lot of overhead resistance (i.e. bag holders) for traders to work through.

SPX Price & Volume Chart for the Week of July 31 2022

No change in the underlying signals:  ADX shows a bullish trend, as does the Price/Volume signal, while Elliott Wave is mixed.

SPX Elliott Wave Analysis for the Week of July 31 2022

The bearish count, shown above, puts the market towards the end of the ongoing bear market bounce, with the index closing just above a target range for the C-wave of a 3-3-5 “flat” pattern.  The RSI didn’t confirm a top (via a divergence), but that’s not necessarily required to end a corrective flat (see late March).  A plausible (but not yet probable) bullish count, with the entire correction ending at the mid-June low, puts the SPX in the middle of the first wave of the next bull market.

COMMENTARY
“Better than expected” was last week’s mantra when it came to financial markets.

For earnings, we touched on the issue of beating estimates verses year over year comparisons.  As of Friday morning, 264 companies in the S&P500 had reported, with aggregate, year-over-year earnings falling -2%. Even positive headlines weren’t all they were cracked up to be.

Take Apple ($AAPL) for instance. The company beat Wall Street expectations for sales and profit. But the year over year numbers weren’t great. Revenue was up 2%, but earnings per share were down 8%. So even though their sales increased, their expenses increased more.

Amazon ($AMZN) also reported financial results, with a similar story to Apple. Headlines said the company reported better-than-expected Q2 revenue ($121B actual vs. $119B expected) and the outlook for Q3 was “upbeat”. What about earnings; you know, actual profit? That figure came in at a loss of 20 cents per share. The company also cut ~100k people from it’s workforce.

Some will point out that there are investment related losses in Amazon’s EPS figure, which is true. There’s ~$2B in losses from their investment in the electric truck manufacturer Rivian alone. So look at operating income, which excludes the investment-related losses. That metric hit $3.3 billion…down from $7.7 billion in Q2 of 2021…or 57% lower y-o-y.

The result? Amazon’s stock price rallied 13%. You’d be hard pressed to find an answer to “tell me we’re in a bear market bounce without telling me we’re in a bear market bounce”.

The U.S. Federal Reserve hiked short-term interest rates another 0.75%. Chairman Powell slipped in a reference to approaching the “natural interest rate” (whatever that means), and many people interpreted that as a sign the worst is over from a tightening perspective. Then I read an opinion that instead of 0.75% to 1% hikes, the Fed is only expected to hike 0.50, 0.25, and 0.25 over the next 3 meetings. We must have been watching different press conferences.

Inflation has likely peaked, as we discussed before.  But even if it gets cut in half by the end of the year, which is unlikely, it would STILL be double the Fed target of 2%.  And that doesn’t even consider the ongoing impact of the Fed balance sheet reductions.

Q2 GDP couldn’t keep up with expectations though, contracting -0.9% (a small increase increase was expected). The reading is the second consecutive quarter of negative growth (Q1 declined 1.6%).

Source: Bureau of Economic Analysis

Since the common definition of a recession is two consecutive quarters of negative GDP, you can see why there was so much airtime devoted to the topic last week. It seems that the 2 quarter definition is actually a rule of thumb, not anything “official”.  Pundits argue that the U.S. can’t be in a recession because:

1. The consumer is “strong”
2. Corporate earnings aren’t “as bad as expected”
3. Unemployment is “low”

It’s all relative of course, which means being “selective with data” like consumer spending and earnings comparisons as we’ve reviewed in prior posts.   But unemployment really is low verses historical data, so I guess 1 out of 3 isn’t bad.   And we can always slice and dice employment data if the recession picks up speed and unemployment threatens to increase.

Financial media (social, online, and otherwise) is awash in calls that the bottom is in, and it’s time to get off the sidelines.  Unfortunately, that’s not how market bottoms are made, from a sentiment perceptive.

Rest assured, the next bull market is coming, and will offer great buying opportunities.  But those opportunities typically occur when retail investors throw in the towel and are disgusted with stocks, not buying them because data isn’t as bad as expected.

In the meantime, look for companies that provide products and services you need to buy regardless of inflation (e.g. consumer staples ($XLP) and utilities ($XLU) ), with low beta values.

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Sources: Bloomberg, CNBC, Hedgeye

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of July 24th = Uptrend

• • ADX Directional Indicators: Uptrend
  • Price & Volume Action: Uptrend
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook flipped to an uptrend Wednesday, with two of three signals switching to bullish trends.  Don’t break out the champagne just yet.  So far this is a textbook, bear-market rally, even though the outlook changed.

Third time’s a charm for the S&P500 ($SPX), finally breaking above May resistance levels.  The S&P500 rose 2.6% for the week, taking out the downward sloping trendline and 50-day moving average for good measure.

SPX Price & Volume Chart for the Week of July 24 2022

ADX directional indicators flipped the bullish trend, so this signal turns green.

Price/Volume shifts to bullish too, as the current rally attempt finally reclaimed the 50-day moving average with minimal distribution days.  Trading volume has also been below average on the upside, and so-called “leading” companies haven’t joined the rally, neither of which is ideal.

2022-07-24 – Innovator IBD50 Fund

I use the Innovator IBD 50 Fund ($FFTY ) as a proxy for that category (innovative new products, accelerating sales and earnings growth, etc.), and you can see the poor performance relative to market averages.

The Elliott Wave signal remains mixed, with both a bullish and count in play. If mid-June marked the start of a bullish, 5-wave impulse pattern, then the SPX is in the third wave of an uptrend. Easy enough.

SPX Elliott Wave Analysis for the Week of July 24 2022

The bearish count puts the index in the C-wave of a corrective, 3-3-5 “flat” pattern. The A-wave topped at 3946 and the B-wave bottomed at 3721, just a few points above the target range. Based on the typical percentages, a C-wave would end in the upper half of the target range (gold shading).

Coincidentally, the resistance level from from late May / early June is also near the top of the C-Wave’s target range. Watch for a negative divergence in the RSI to develop when the pattern completes, similar to the action at the top of the last bear-market rally.

COMMENTARY
Earnings season is upon us, and margins declining margins are showing the impact of labor, supply, and demand issues. Not to worry; where there’s a will, there’s a way, so you can still find very bullish talking points.  I read one article stating 2nd quarter results have been reasonably positive so far, because profit growth has exceeded expectations by ~4%!

“Better than expected” may seem like something to celebrate, but scope the year over year number.  A large portion of those same “results” show profits are down -14.5% from Q2 last year.  Beating expectations by 4% isn’t great if those expectations are down more than 10% year over year.  That’s decelerating growth, regardless of whether it’s above estimates.

Take Discover Financial Services ($DFS) for example.  The credit-card company posted Q2 revenue of $3.2 billion (higher vs Q1), with $1.1 billion in net income, and earnings per share of $3.96.  Since EPS estimates were $3.75 per share, commentators and headlines state that Discover beat estimates!  Hurray!  Buried in most articles are the year-over-year numbers, showing revenue down ~10% and net income down 35%! Yikes.

While we’re at it, make sure those earnings are “GAAP”, not “adjusted”.  Generally Accepted Accounting Principles are what make comparisons possible (i.e. apples to apples). “Adjusted” earnings are just that; earnings that management adjusts for “temporary” or 1-time events. You know, sort of like inflation being “transitory”?  If companies are only doing well on an “adjusted” basis, they’re not doing well.

AT&T ($T) also reported troubling results.  Not so much from an earnings standpoint, although those weren’t great, but from a consumer standpoint.  During the earnings call, their CFO said that customers were paying their bills more slowly than last year, and that in prior recessions this was common.  So much for that strong consumer…

In additional to more company results, the U.S. Fed will hike interest rates this week.  Do they raise 100 basis points, sighting the high CPI/PPI?  Or do they raise 0.75% because that’s what they said in June?  Do they communicate another hike in September, or “pause” to see how markets respond? You’re guess is as good as mine.

It’s also month end, with a weekly option expiration, which is usually good for at least 1 day of wild price action as firms rebalance & rehedge their books.

But most importantly, we’ll see Q2 GDP on Thursday.

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of July 17th= Downtrend

• • ADX Directional Indicators: Downtrend
  • Price & Volume Action: Mixed
  • Elliott Wave Analysis: Mixed

ANALYSIS
The stock market outlook stays with the downtrend, since the S&P500 didn’t make much progress last week. The S&P500’s ($SPX) second attempt to break-through May resistance levels failed, and now we’re on to the third. For the week, the index fell 0.9%.

SPX Price & Volume Chart for the Week of July 17 2022

No change in the ADX directional indicators (bearish) or price/volume action (mixed). And add two more distribution days.

SPX Elliott Wave Analysis for the Week of July 17 2022

The Elliott Wave signal retreats to mixed this week.  The S&P500 briefly fell below last week’s “higher low”, breaking support at 3739.   As mentioned last week, trading firms actively trade support and resistance levels, so the recover Thursday and Friday isn’t that surprising.

COMMENTARY
US CPI data for June showed an increase of 9.1% verses a year ago and 0.5% higher than last month. Expectations were already high (8.8%), so coming in below expectations wouldn’t REALLY be something to celebrate. The smallest sliver of a silver lining was Core CPI, which +5.9% higher than last year, but down from the 6% y-o-y reading last month.

This situation is playing out across the globe, not just the United States.  Take a look at some CPI data from Europe:

• Denmark = up +8.2% from +7.4%
• France = up +5.8% from +5.2%
• Germany = flat at +7.6%
• Norway = up +6.3% from +5.7%
• Portugal = up +8.7% from +8.0%

Another key inflation dataset, the U.S. producer price index (PPI), reported an increase of 11.3% y-o-y.  Finally, the spread between 2-year and 10-year treasury notes hit -26 basis points (biggest negative spread in 22 years), ended the debate about yield curve inversion.

Even if future rate hikes are already priced in (June CPI & PPI guarantee more hikes) and the effect of quantitative tightening negated (it isn’t), most corporate earnings guidance hasn’t been taken down yet. The few firms that have made adjustments (e.g. Target, Walmart, Restoration Hardware) saw their stock price crushed.

What happens to the market if/when companies with large weightings (e.g. Apple, Google, Tesla) decide to revise guidance lower?  We’ll soon find out.  Earnings season kicked off last week, with JP Morgan missing estimates and suspending its stock buyback program, citing “‘never-before-seen” conditions. Morgan Stanley didn’t fair much better.   Both stocks were hammered.  Citigroup beat expectations and maintained guidance for the year, and enjoyed some pretty strong price action.

DO NOT base investment decisions on the fact that a stock is down double-digit percentages from an all time high. When someone says a stock is “cheap” because its price has been cut in half, they’re assuming the stock was valued correctly in the first place. Chances are it was not, and that’s before considering the new interest rate environment going forward.

Rising interest rates increase the cost of capital, which increases corporate expenses and suppresses future earnings growth. So as long as central banks are changing interest rates and financial conditions, valuations and stock prices also need to be adjusted.

In other words, a stock that looks “cheap” verses a year ago (low interest rates, economy re-opening, stimulus checks and quantitative easing) may actually still be “expensive” when compared to future earnings (rising interest rates, recession, quantitative tightening).

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com is subject to our Terms of Service and Privacy Policy.

Not a recommendation to buy or sell any security.