Stocks finished higher during this news filled last week in August as investors ignored rising interest rates and geopolitical issues abroad, choosing to focus rather on strong corporate earnings momentum and sound enough economic data. Yes, interest rates have moved higher. However, thus far the market has been able to digest the slow move and will most likely be able to continue to do so unless that pace quickens. In addition, if the outstanding earnings from Nvidia (NVDA), along with spending projections are any indication of future capex the market is on sound footing.
· Fed Chair Kevin Warsh made some notable comments Friday “during a speech concluding the Economic Policy Symposium, sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming.
o “The job for policymakers is to capture underlying trend inflation – that is, the generalized change in prices in the economy, unaffected by idiosyncratic factors. We want to gauge whether underlying inflation is rising, falling, or stuck in place. We also want to understand not just the direction of travel, but also the speed. Each of these broad inflation measures has fallen significantly from their 2022 heights. But progress over the past two years has been modest. And while this summer’s PCE and CPI readings have were better than expected, they do not tell me that underlying trends have meaningfully improved.”
o “The Fed’s price-stability objective of 2 percent, as measured by the Personal Consumption Expenditures (PCE) price index, is a firm, fixed target. Let’s be equally clear about another aspect of the objective: Price stability is not self-executing, not is inflation necessarily mean-reverting. It is the Fed’s job to deliver stable prices.”
· During a speech unveiling the Trump Administration’s Plan to Isolate Iran, Treasury Secretary Scott Bessent called-out China. “We want to make clear here today that no one is above the reach of U.S. sanctions.” In regard to China Bessent added that “if they facilitate transactions and are part of the ecosystem that turns Iranian oil into money, into repression, they will be targeted.” That is nothing short of calling down the thunder (Tombstone, great western). Our guess is that over time the Administration will backpedal from this threat.
· Earlier This Week, Jeff Marks Published an Article that Contained the following. “In the past month, the governors of Texas and Pennsylvania have pivoted to a harder-line stance against data center developers. These former champions of AI data center investment in their states are not placing stricter standards on construction projects and requiring additional disclosures to root out more speculative activity. We expect rhetoric against data centers to intensify as we move closer to the midterm elections in November, potentially leading to a slowdown in new investment activity.” We agree with Marks. However, we also think that post-election activity will pick up again, suggesting that any short-term weakness in share price would be a buying opportunity.
· Meta Platforms (META) settled a lawsuit, brought about by 29 states alleging that the social media company misrepresented the child related mental health issues caused by their most popular apps, Facebook and Instagram. In addition to the monetary penalty of nearly $17 billion Meta agreed to impose a two-hour daily time limit that teens can only turn off with a parent’s permission, a default block between midnight and 6am, muted notifications during school hours between 8am and 3pm and to send prompts after every 15 minutes of continuous screen time on Facebook and Instagram. Unfortunately, the horse is already out of the barn. Notwithstanding, this most likely clears the air for the stock price of Meta to move higher.
· In a 16-page essay former Microsoft (MSFT) Founder and CEO Bill Gates warned of the potential dangers of Artificial Intelligence (AI). Among other items, Gates expressed concern for the labor market, the increased ability for nefarious activity by individuals and rogue nation states and a stunting of adolescent intellectual development. Gates noted that given an absence of guardrails, developers of AI will proceed at a pace of “full speed ahead and hoping that the good outweighs the bad.” We think the Federal Government should step in NOW to provide these guardrails and not wait like they did with social media (see above) or otherwise society may end up with a problem much larger than that of social media. Fingers crossed.
Economic Data That Drove Market Sentiment This Past Week…
- The University of Michigan reported that its Final August Reading of Consumer Sentiment rose to (-11.2% y/y) from a preliminary August 51.0 as well as from a final July 55.2. The final August expectations component rose to 51.5 (-7.9% y/y) from a preliminary August 50.6 but slipped from a final July 55.4. Lastly, the final August current conditions component edged up to 51.9 (-15.9% y/y) from a preliminary August 51.8 but also slipped from a final July 54.8. According to the Survey of Consumers Director, Joanne Hsu, “consumer sentiment confirmed its early month reading, falling about 6% from last month and landing about 11% below a year ago amid continued worries that inflation will remain elevated for the foreseeable future. Sentiment declines in August were seen for all political groups and were particularly acute among Republicans.” (Source, Univ of Michigan)
- Second Quarter Inflation Adjusted (Real) Gross Domestic Product (first revision), as reported by the Commerce Department, a tally of the output of all goods and services in the United States, rose at an annualized rate of 1.5% (2.1% y/y), unrevised from the initial estimate, but lower than the 2.1% SAAR during Q1. Real Final Sales to Domestic Purchasers rose at an annualized rate of 4.2%, up from an initial estimate of 3.9%. Government Spending (Government Consumption Expenditures and Gross Investment), slipped by a revised 1.0% during Q2, a substantial deterioration from the initial 0.8% that was reported. The PCE Price Index rose at a revised annual rate of 5.3% during Q2, up from an initially reported 5.1%. While the PCE Price Index Excluding Food and Energy rose at an upwardly revised annual rate of 3.6% during Q2, up from an initially recorded 3.4%. (Source, U.S. Bureau of Economic Analysis)
- The Bureau of Economic Analysis reported that Personal Income rose 0.4% during July after rising 0.2% in June. However, after adjusting for inflation, Personal Income rose 0.3% during July after rising 0.4% in June. Consumer spending, or Personal Consumption Expenditures rose 0.3%, after climbing 0.2% during June. However, when adjusting for inflation, real consumer spending edged was unchanged. Inflation remains a key factor, as the PCE Price Index rose 0.2% for the month and by 3.7% year-over-year. The core index, which excludes volatile food and energy costs, rose 0.2% from the previous month and by 3.3% y/y. Amidst these shifts, the Personal Saving Rate rebounded to 3.0% of disposable income, up from 2.6% in June.
- Orders for Durable Goods (those expected to last at least three years) rose 1.1% during July, after rising 0.5% during June. Smoothing out the m/m volatility, Orders for Durable Goods have advanced 7.6% y/y. Transportation Equipment Orders rose 2.3% (4.7% y/y), after falling 0.5% the prior month. Excluding transportation, new orders rose 0.4% during July (9.2% y/y), after rising 1.1% during June. (Source, U.S. Census Bureau)
- The U.S. Census Bureau reported that New Single-Family Home Sales fell 71,000 during July to a Seasonally Adjusted Annualized Rate (SAAR) of 607,000 from 678,000 during June (-6.3% y/y). Sales of New Homes have fallen 41.1% from their peak of 1.031 million in October 2020 and 52.5% from the peak in July 2005 of 1,279,000 units. However, they have risen 17.0% above their July 2022 low of 519,000. The median sales price of a new home slipped 2.3% (-0.9% y/y) to $393,800 in July from $403,100 in June, this as the average sales price of a new home rose 4.1% (5.4% y/y) to $508,800 from $488,900. The average price is 6.0% below the high of $541,200 in July 2022. These sales prices are not seasonally adjusted. The number of unsold new homes on the market rose 1.9% to 488,000 (-1.6% y/y) from 479,000 in June. The seasonally adjusted months’ supply of new homes for sale rose to 9.6 months in July from 9.3 in June as the median number of months a new home stayed on the market fell to 3.2 months during July from 3.5 in June, well below the low of 6.9 months in May 2023. (Source, U.S. Census Bureau)
- The Conference Board’s Consumer Confidence Index fell to 89.4 (-8.6% y/y) during August from 90.2 in July. The present situation index rose to 121.2 in August from 114.4 (-8.6% y/y) while the expectations component fell by 5.8 points to 68.2 (-8.7% y/y) from 74.0. Those surveyed saying that jobs are “hard to get” fell to 19.5% of respondents during August from 21.7% in July while those claiming that jobs were “plentiful” rose to 27.0% of respondents from 24.4% during those same months.
Economic Reports scheduled to be released this week, include the following – on Tuesday, July Construction Spending and the July Job Openings and Turnover Survey (JOLTS); on Wednesday, July Factory Orders; on Thursday, Initial Weekly Claims for Unemployment Benefits and July Trade Balance; and, on Friday August Nonfarm Payroll and August Unemployment Rate.
Several potentially market moving companies are scheduled to report earnings, to include Costco Wholesale (COST), Darden Restaurants (DRI), Jabil (JBL), Mongo DB (MDB), Nike (NKE), Snowflake (SNOW), Broadcom (AVGO), KB Home (KBH), General Mills (GIS), Worthington Enterprises (WOR), Cracker Barrel (CBRL), AutoZone (AZO), Lennar Corp (LEN), Docusign (DOCU), Dell Technologies (DELL), Zscaler (ZS) and Carnival Corp (CCL).
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