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Stock indexes are mixed with the ongoing big tech pullback still dragging on the S&P 500 and Nasdaq. Many on Wall Street see the rotation into smaller-cap stocks and other corners of the market that are perceived to be “undervalued” as a natural reaction to Federal Reserve rate cuts that are expected to begin by September.
Keep in mind, investors have shied away from companies and sectors that are viewed as sensitive to economic headwinds because of lingering concerns that the Fed’s tight monetary policy might drag on consumer spending and even push the US economy into recession.
Fed Chair Jerome Powell and other Fed officials have said that they are shifting their focus away from inflation and more to the job market as they prepare to cut rates. Some have argued that the Fed should make its first cut in July because waiting until September (there is no August meeting) risks pushing the unemployment rate too high and damaging the economy but traders still think the odds are slim for a July cut.
It’s worth noting that the first estimate of second quarter GDP (gross domestic product) showed US economic growth surged to an annualized rate of +2.8%, a big jump from growth of +1.4% in the first quarter and far higher than the +2.0% growth Wall Street expected.
Bulls point out that the economy in Q2 2024 continued to gain strength even as inflation started notching a significant slowdown. CPI released earlier this month showed headline inflation slowed to +3.0% in June from +3.3% in May. PCE Prices for June is due out today and expected to show a decline in the headline rate to +2.5% from +2.6% previously.
Wall Street expects the PCE Prices “core” rate, which strips out food and energy and is one of the Fed’s favorite gauges, to also come in at +2.5%. Data so far certainly doesn’t give the Fed any reason to raise rates but it also doesn’t provide any sense of urgency to cut them. Meaning if US data continues to show no indications that high interest rates are damaging the economy and job market, the Fed will probably wait until September before making its move.
The job market will be the key focus on the economic data front next week with the July jobs report due out on Friday.
Other jobs data will include the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday, and ADP’s private payroll report on Wednesday.
Next week is also an important week for Q2 2024 corporate earnings with some of the world’s biggest tech companies set to report results - Microsoft reports on Tuesday, Meta on Wednesday, and Apple and Amazon on Thursday.
For what it’s worth, Google-parent Alphabet reported slightly better than expected earnings and revenue results on Tuesday and the company’s stock has lost nearly -10% since then. Meaning, we could see some profit taking despite delivering good earnings.
Some of next weeks other highlights will be McDonald’s on Monday; Advanced Micro Devices, BP, Electronic Arts, Phillips66, Merck, Pfizer, Procter & Gamble, and Starbucks on Tuesday; ADP, Aflac, Allstate, Boeing, Ingersoll Rand, Johnson Controls, Marriott, Mastercard, TMobile, and Trane on Wednesday; AnheuserBusch InBev, Coinbase, ConocoPhillips, Intel, Regeneron, and Shell on Thursday; and Berkshire Hathaway, Chevron, and Exxon Mobil on Friday.
Earnings today include 3M, ColgatePalmolive, and T. Rowe Price.
237 Cities Reporting "Starter Homes" Now Costing +$1 Million: What can you get with $1 million in today’s housing market? A starter home. Just a few years ago, one might expect a large, well-cared for home with a lush lawn and maybe even a pool for $1 million. But not anymore. The typical starter home — defined as the lowest third of residential values in a region — has a seven-figure price tag in 237 cities. Starter home values have grown by +54% over the past five years. Many Americans who dream of homeownership have been forced to save much more for longer, delay important milestones, and in some cases, give up on owning altogether. The average age of first-time buyers has climbed to 35 years old, highlighting the struggle to afford a home in today's market. Read more at Bloomberg... And we thought only farm ground had gotten crazy expensive. Now, $1 million dollar starter homes. Wow! Source Bloomberg
Southwest Airlines Ends "Open Seating": Southwest Airlines is ending open seating and will offer extra legroom seats on its airplanes as mounting pressure on the carrier to increase revenue prompts the biggest changes to its business model in its 53 years of flying. The airline plans to start selling the first flights that will offer extra legroom next year. It also plans to begin overnight flights starting in February. Southwest executives have said for years that they were studying such changes and hinted in April that the airline was seriously considering assigning seats and offering extra legroom options. When travelers choose a competitor over Southwest, the airline found in its research that its open seating model was the No. 1 reason for that choice, the carrier said in a release that outlined the changes. It also said 80% of its own customers prefer an assigned seat. Source CNBC
Corporate Insiders Are Dumping Stock at the Fastest Rate in More Than a Decade: Corporate insiders have taken a sharply pessimistic turn, selling their companies’ shares at the fastest rate since 2014. That’s according to InsiderSentiment.com, a website maintained by Nejat and Jon Seyhun. The former is a finance professor at the University of Michigan and one of academia’s leading experts on interpreting the behavior of insiders. In calculating their insider-sentiment indicators, the Seyhuns focus only on two of the three categories that the law defines as insiders, corporate officers, and directors and ignore the third a company’s largest shareholders. That’s because Professor Seyhun has found from his research that these large shareholders, on balance, have no privileged insight into their companies’ prospects. Because their transactions are typically several orders of magnitude larger than those of officers and directors, including them in the study skews the much more valuable signals coming from officers and directors. The insider indicator that the Seyhuns calculate is the percentage of all companies with any officer or director transactions for which there has been net buying. The past decade’s average is 26%, and up until July, this ratio had been slightly to moderately below this average. In the first three weeks of July, however, the insider buy ratio turned “deeply negative" to 13.6%. Furthermore, according to the Seyhuns’ analysis, insider selling has been reported all across the markets, as insiders are pessimistic about both growth and value, small and large firms, and winners and losers, they wrote. Source MarketWatch
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