The rally in the equity market broadened this past week as the small cap Russell 2000 rose over three percent while the NASDAQ Composite fell. In fact, 119 of the 138 U.S. Total Market Industry Groups rose (see below), all this while five of the so-called “Magnificent Seven” fell (Amazon, Apple, Meta Platforms, Microsoft, Nvidia) while only two rose (Alphabet, Tesla). At this moment we wouldn’t make too much of this rotation as the potential for a rate cut when the Fed meets next in September favors this week’s laggards. Notably, when the market rallied Friday as a result of dovish comments coming from Fed Chair Jerome Powell, the Mag 7 led the way. It was just not enough to dig these companies out of the hole they had dug during the first four trading days of the week.
We have often noted that the tariff induced correction culminated the morning of April 9 when President Trump pivoted from his hard stance on this issue to one that is much more malleable. We believe that it is safe to say that the record setting rally this past Friday was a result of Fed Chair Fed Powell pivoting toward a more dovish stance in regard to monetary policy.
- While speaking at the annual Economic Policy Symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell noted the following which, in turn, sparked a sizable market rally:
- “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
- “While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly.”
- “It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and this is a risk to be assessed and managed.”
- Within the monthly report on Existing-Home Sales, National Association of Realtors Chief Economist noted that “near-zero growth in home prices suggests that roughly half the country is experiencing price reductions. Overall, homeowners are doing well financially. Only 2% of sales were foreclosures or short sales – essentially a historic low. The market’s health is supported by a cumulative 49% home price appreciation for a typical American homeowner from pre-COVID July 2019 to July this year.” Yun further noted that “homebuyers are in the best position in more than five years to rind the right home and negotiate for a better price. Current inventory is at its highest since May 2020, during the COVID lockdown.” (See data below.)
- In addition to dividing its Artificial Intelligence (AI) Division into four teams, Superintelligence, AI Products, Infrastructure and Fundamental AI Research, Meta Platforms (META) announced that it was implementing a temporary freeze on hiring within the Division, characterizing it as “basic organizational planning.” We note this restructuring as it suggests the possibility that the hundreds of billions of dollars being spent on developing AI does bring with it a certain level of risk that the costs may, at least over the short-term, outweigh the economic benefits.
- Disney (DIS) announced that it recently launched a new ESPN streaming service outside of traditional cable bundles. The new ESPN would offer two plans, ESPN Unlimited and ESPN select with the former being priced at $29.99/m or $299.99/y and the latter at $11.99/m or $119.99/y. In addition to the cost, this new service will continue to battle intense competition for streaming rights, content fragmentation, high customer acquisition and retention costs.
It’s The Economy…”
- Initial Claims for Unemployment Benefits for the week ended August 16th rose 11,000 to 235,000 from 224,000, which was unrevised. The four-week rolling average rose 4,500 to 226,250 from 221,750, which also went unrevised. Continuing claims for the week-ended August 9th rose 30,000 to 1,972,000 from 1,942,000, which was revised lower by 11,000. The continuing claims four-week average rose 6,500 to 1,954,500 from 1,948,000. (Source, U.S. Department of Labor)
- Sales of Existing Homesrose 2.0% to a Seasonally Adjusted Annualized Rate (SAAR) of 4.01 million units during July from 3.93 million during June (0.8% y/y). According to the National Association of Realtors (NAR) total housing inventory at the end of July was 1.55 million units, up 0.6% from May (15.7% y/y). Unsold inventory sits at a 4.6-month supply at the current sales pace, down from 4.7 months in June, but up from a low of 1.6 months in January 2022. The report also noted that the median existing-home price for all housing types in June was a record $422,400, down 2.4% m/m but up 0.2%.(Source, National Association of Realtors)
- The Conference Board reported that its U.S. Index of Leading Economic Indicatorsslid 0.1% during July, after falling 0.3% during June. The US LEI fell 2.7%over the trailing six months. “Pessimistic consumer expectations for business conditions and weak new orders continued to weigh down the index. Meanwhile, stock prices remained a key positive support of the LEI, Initial claims for unemployment insurance were much lower in July than in June and were the second most positive component of the LEI, after contributing negatively to the index over the previous months,” this according to Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at the Conference Board. (Source, The Conference Board)
- Housing Starts rose 5.2% or by 70,000 to a seasonally adjusted annualized rate (SAAR) of 1,428,000 during July as compared to 1,358,000 in June (12.9% y/y). A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units build annually to account for household growth and to replace existing stock. During July, Single-family housing starts rose 2.8% or 26,000 to 939,000 from 913,000 (7.8% y/y). Meanwhile Multifamilyhousing starts rose 9.9% to 489,000 in July (24.1% y/y) from 445,000 during June. Building Permits, a key barometer for future starts, fell 39,000 to 1,354,000 in July as compared to June (-5.7% y/y). (Source, U.S. Census Bureau)
Economic Reports scheduled to be released this week include the following: on Monday, July New Home Sales; on Tuesday, July Orders for Durable Goods and August Consumer Confidence; on Thursday, the Weekly Report of Initial Claims for Unemployment Benefits along with the First Revision to Second Quarter Gross Domestic Product; and, on Friday July Personal Income and Spending.
The Q2 Earnings Season has begun to wind down. Nonetheless, the following companies are scheduled to report this weekCrowdStrike Holdings (CRWD), Nvidia (NVDA), Agilent Technologies (A), Snowflake (SNOW), Veeva Systems (VEEV), Trip.com (TRIP), Marvell Technology (MRVL), Autodesk (ADSK), Dell Technologies (DELL) and Alibaba (BABA).