Stocks sold off this week as the sector that is/was the market leader, namely semiconductors, has sold off hard ever since Micron Technology (MU) report stellar earnings a couple of weeks ago, but still moved lower, calling into question the entirety of the AI trade. Given the nature of market action this time of year and ahead of the mid-terms, we would encourage investors to be patient, but look for opportunities should the selling in technology, communication services or consumer discretionary accelerate. Outside these three areas, stocks are making headway as investors have turned a little more defensive.
On the economic front, we couldn’t have received better news as inflation at both the retail as well as wholesale level along with import and export prices were more subdued than expected while housing performed above expectations. This led to a sharp downturn in expectations for a rate hike from the Federal Reserve when it meets later this month.
· SpaceX (SPCX) has tumbled sharply over the past couple of weeks, primary over concerns of valuation, sending the share price below its IPO of $135 approximately one month ago. Shares peaked at above $230 before closing Friday at $124.14. You can nibble at shares and we have. However, it remains like trying to catch a falling knife.
· Shares of Alphabet (GOOGL) came under selling pressure on reports that the company is months behind scheduling on delivering AI model, Gemini 3.5 Pro due to engineering challenges. Despite the recent selling, shares of GOOG are still up more than 10% year-to-date and nearly 90% y/y. That said, be patient. No need to be a hero.
· Financial Stocks Shine. JP Morgan (JPM, Citigroup (C) and Goldman Sachs (GS), among others, reported quarterly earnings that soundly beat expectations, sending shares higher. We like the financials and believe they can be bought at or around these levels.
Economic Data That Drove Market Sentiment This Past Week…
- Housing Starts surged 19.0% or by 228,000 to a seasonally adjusted annualized rate (SAAR) of 1,427,000 during June as compared to 1,199,000 in May (3.5% y/y). The number of starts during May represented the lowest since May 2020, a period of COVID related lockdown. A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units built annually to account for household growth and to replace existing stock. During June, Single-family housing starts fell 0.2% or 2,000 to 895,000 (-3.2% y/y). Meanwhile, Multifamily housing starts rose 76.3% to 513,000 in June (19.3% y/y) from 291,000 during May. Building Permits, a key barometer for future starts, rose 43,000 to 1,410,000 in June as compared to 1,367,000 during May (-2.3% y/y). (Source, U.S. Census Bureau)
- U.S. Export Prices fell 0.6% during the month of June (10.2% y/y) after climbing 1.2% in May. Import prices rose 0.3% during June (7.1% y/y) after rising 1.7% in May. Agricultural export prices rose 0.2% during June (4.6% y/y), after rising 0.9% during May. Non-Agricultural Export Prices fell 0.7% during June (10.6% y/y) after jumping 1.2% during May. Please note that import and export prices are not affected by tariffs as they are measured prior to taxes. (Source, U.S. Bureau of Labor Statistics)
- The University of Michigan reported that its Preliminary July Reading of Consumer Sentiment rose to 54.4 (-11.8% y/y) from a final June level of 49.5 as well as from a preliminary June 48.9. The preliminary July expectations component rose to 54.7 (-6.4% y/y) from a final June 50.7 and from a preliminary June 49.3. Lastly, the preliminary July current conditions component jumped to 54.7 (-19.3% y/y) from a final June 47.7 as well as from a preliminary June 48.4. According to the Survey of Consumers Director, Joanne Hsu, “with the second straight month of 10% jumps, consumer sentiment climbed to its highest level since February of this year on the basis of easing price pressures at the pump in recent weeks. All five index components improved, led by significant 20% increases in buying conditions for durables as well as year-ahead business conditions.” (Source, Univ of Michigan)
- Retail Sales rose 0.2% in June (6.7% y/y), after rising an upwardly revised 1.0% in May. Spending on Motor Vehicle & Parts rose 1.9% during June (5.7% y/y) after rising 1.1% in May. Retail Sales Excluding Motor Vehicles & Parts fell 0.2% during June (6.9% y/y), after rising 1.0% during May. Two key components of this report, Sales at Gasoline Stations fell 5.3% during June (19.8% y/y) after rising 2.6% in May as Restaurant and Drinking Place Sales edged 0.1% higher during June (3.8% y/y) after rising 1.2% in May. Also of note was the 0.8% rise in sales at electronic & appliance stores (8.6% y/y) as well as the 0.4% slide in sales at grocery stores (0.9% y/y). (Source, U.S. Census Bureau)
- Prices at the wholesale level as measured by the Producer Price Index slipped 0.3% during June, this after rising 0.6% in May. Over the past year the PPI has risen 5.5%, down from 6.5% in May. Energy prices fell 6.4% during June (23.0% y/y) after rising 8.4% in May. Finished food prices fell 0.6% during June (1.8% y/y) after rising 0.5% in May. Excluding food, energy and trade, the core PPI rose 0.1% during June (5.1% y/y), after rising 0.8% in May. Prices for Intermediate Goods fell 1.2% during June (11.1% y/y) after rising 2.8% in May. (Source, U.S. Bureau of Labor Statistics)
- Inflation at the Retail Level as measured by the Consumer Price Index fell 0.4% during June (3.5% y/y), after rising 0 5% during May. The CPI has fallen from a y/y high of 9.1% during June 2022 but remains stubbornly elevated relative to the Fed’s 2.0% target. Energy prices slumped 5.7% during June (15.7% y/y) after spiking 3.9% in May. Food at home prices rose 0.2% (2.7% y/y) during June after advancing 0.1% in May. The cost of shelter rose 0.1% during June (3.3% y/y), after rising 0.3% during May. Excluding food and energy, the core CPI was flat during June, after rising 0.2% during May. Over the past year the core CPI has risen 2.6%, well below the September 2022 peak of 6.6%. (Source, U.S. Bureau of Labor Statistics)
- Sales of Existing Homes fell 2.4% (2.8% y/y) to a Seasonally Adjusted Annualized Rate (SAAR) of 4.09 million units during June from 4.19 million during May. According to the National Association of Realtors (NAR) total housing inventory at the end of June was 1.56 million units, down from 1.57 million units in May, but up by 1.3% y/y. Unsold inventory rose to 4.6 months, up from 4.5 months during May. The report also noted that the median price for all existing homes rose 2.2% (1.8% y/y) to $440,600 in June from $431,200. (Source, National Association of Realtors)
Economic Reports scheduled to be released this week, include the following – on Monday, June U.S. Index of Leading Economic Indicators; on Thursday, Initial Weekly Claims for Unemployment Benefits; and, on Friday, June New Home Sales. Several potentially market moving companies are scheduled to report earnings, to include Novartis (NVS), Charles Schwab (SCHW), Philip Morris (PM), GE Vernova (GEV), Alphabet (GOOG), Tesla (TSLA), Texas Instruments (TXN), TotalEnergies (TTE), Thermo Fisher (TMO), Intel (INTC), RTX (RTX), Verizon (VZ), NextEra Energy (NEE) and American Express (AXP).