Stock investors have a very busy week ahead, including Federal Reserve Chair Jerome Powell’s semi-annual testimony before Congress, key inflation updates, and the “unofficial” start of Q2 2024 earnings season.
The S&P 500 and Nasdaq are starting the week at new record highs amid a further cooldown in the labor market, which has in turn renewed some optimism about Fed rate cuts later this year.
The June jobs report on Friday showed a gain of +206,000 versus a downwardly revised gain of +218,000 in May. The unemployment rate in June ticked up to +4.1% while hourly wage gains slowed significantly to +3.9%.
Bulls argue that the continued signs of weakness in the labor market provides more proof that can justify the Fed cutting rates as soon as the September FOMC meeting. In fact, the market is saying there's a 75% chance that the Fed will cut rates by -50 to -100 basis points by year end.
Bears, on the other hand, are raising more alarms that softer data is signaling bigger problems ahead for the labor market and overall economy. Bears are divided between outlooks for recession and “stagflation” (high inflation, high unemployment, and slowing growth), though most seem to think stagflation is the more likely outcome due to high inflation sticking around.
The inflation trajectory will be tested Thursday with the Consumer Price Index (CPI) which showed a slowdown in both the headline and “core” (strips out food and energy) rates in May. The Producer Price Index (PPI) follows on Friday. Investors will also be looking to glean clues about the Fed’s current thinking as Fed Chair Jerome Powell testifies before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.
It’s worth noting that Powell last week said that while the labor market and economy remain strong, inflation has recently shown no signs of resuming. It’s also worth noting that the “minutes” from the Fed’s June policy meeting showed that concerns are rising among officials about the growing strain on lower to moderate-income consumers. Amid the uncertain economic outlook,
Wall Street insiders are growing more concerned that stock valuations are stretched, led by overly-optimistic outlooks for AI-related tech companies. Bears still strongly believe that the AI rally has gotten ahead of itself and that unrealistic expectations heading into Q2 2024 earnings season could be setting tech bulls up for a hard fall.
Wall Street analysts project second quarter earnings growth for the so-called “Magnificent 7” stocks, which includes Google-parent Alphabet, Amazon, Apple, Facebook-parent Meta Platforms, Microsoft, Nvidia, and Tesla - at almost +30% year-over-year, while earnings for the rest of the S&P 500 index are forecast to be up a little over 7%.
For what it’s worth, earnings among the Magnificent 7 rose +51.8% year-over-year in Q1 2024 versus +1.3% growth for the other 493 members of the S&P 500.
Stock index gains in the first half of the year were led by an even smaller group of just five companies including, Nvidia, Meta, Alphabet, Amazon, and Microsoft, which combined accounted for over +60% of the S&P 500's returns.
Keep in mind, big Wall Street banks Citigroup, JPMorgan, and Wells Fargo “unofficially” kick off Q2 2024 earnings season on Friday. Bulls are saying Q2 earnings should surprise to the upside and that the growth forecasts and outlooks for the next three to four quarters will also be more positive. At the same time, there's starting to be more negative talk and worry about "unemployment" and layoffs. Considering this is happening just ahead of a US presidential election, there's talk inside the trade that it could place more dovish political pressure on the Fed to respond with lower rates which could add even more nearby bullish fuel to the fire.
Keep in mind, the S&P 5000 is already up +17% on the year.
Latest Presidential Talk: The word out of Washington is that former President Trump is talking about making Florida Senator Marco Rubio or Ohio Senator JD Vance his Vice Presidential running mate. Remember, the GOP Convention is scheduled for next week (July 15-18) in Milwaukee, WI. At the same time, President Biden is facing new calls from prominent Democrats to exit from the race. The Wall Street Journal reported, "In a private meeting of senior House Democrats, several attendees said Sunday that they believed Biden should step aside. The members who said they believed he should exit from the race included Reps. Jerry Nadler and Joe Morelle of New York, Adam Smith of Washington, Jim Himes of Connecticut, and Mark Takano of California." There are now 120 days until the November 5th election.
New Derivative Product Will Let You Wager on Future Events: Betting on the latest economic report could be as simple as choosing “yes” or “no.” The trading platform Interactive Brokers Group is launching contracts that allow customers to wager on future events related to the economy and climate. The contracts let users take yes-or-no positions on questions such as whether the consumer-price index will rise above a certain number or if the global temperature will reach a specific level. Interactive Brokers’ prediction market, ForecastEx, is set to begin operating today, July 8, the company said. ForecastEx recently received the necessary approvals from the Commodity Futures Trading Commission to operate. The contracts are a new type of derivative and aren’t securities. The contracts that will be available at launch include economic and climate indicators such as the Federal Reserve’s target interest rate, U.S. consumer sentiment, national debt, retail sales and atmospheric carbon dioxide. Interactive Brokers plans to expand to indicators around the world and other topics in the future. Prediction markets will probably be the most impactful markets in shaping our society’s response to these crucial questions, Thomas Peterffy, founder and chairman of Interactive Brokers, said in an interview. Adding that, once we have these markets running, we will always see the consensus. Source WSJ
Buying Bullets from Vending Machines: It’s no secret that Americans love guns. But did you know that in some states, you can now purchase ammo out of a vending machine? The company behind this new trend is called American Rounds . The company has created an identity verification mechanism for its bullet vending machines that can verify how old the person is who is buying the ammunition. American Rounds says, “Our smart retail automated ammo dispensers are accessible 24/7 and have built-in AI technology, card scanning capability, and facial recognition software. Each piece of software works together to verify the person using the machine matches the identification scanned.” From what I understand, the vending machines are currently in a few locations in Alabama and Oklahoma with more to come... Who would have ever guessed?
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Survey Details Stark Differences Between Younger and Older Wealthy Investors: Bank of America Private Bank’s biennial survey of wealthy Americans revealed a generational divide in the perceived greatest opportunities for asset investment and growth. What we found was some stark differences in approaches to investing and mindset toward overall investing, Michael Pelzar, head of investments at Bank of America Private Bank, told Yahoo Finance. According to the data, that Bank of America discovered about the younger investors surveyed, 47% of the younger cohort's portfolios are invested in stocks and bonds. That's much lower than the older cohort, which was 74%. Also, more younger investors are invested in alternative assets than older investors, and almost all of the younger cohort said they plan to allocate more to alternatives in the next few years. Additionally, 49% of the young cohort own cryptocurrencies, and 38% expressed some interest. Behind real estate, this cohort ranked crypto as the top area for opportunity. Source Yahoo finance
Ports Along Texas Coast Close Ahead of Tropical Storm Beryl: Ports along the Texas coast were closing or restricting vessel traffic on Sunday to prepare for Tropical Storm Beryl, which was expected to strengthen back to a hurricane before hitting the area early on Monday. The storm, which at one point intensified to a Category 5 hurricane, left a deadly trail of destruction across the Caribbean. It could grow into a Category 2 hurricane when it makes landfall in the middle of the Texas coast between Galveston and Corpus Christi, the U.S. National Hurricane Center said. The port of Corpus Christi said it was closed after condition "Zulu" was set by the Coast Guard captain on Sunday. All vessel movement and cargo operations are restricted as gale force winds are expected. Corpus Christi, about 200 miles (322 km) from Houston, is the top crude oil export hub in the United States. Port closures could bring a temporary halt to crude exports, oil shipments to refineries, and motor fuels from those plants. The port of Houston's eight public facilities were set to close operations on Monday, a spokesperson said. The 52-mile Houston ship channel, which on Sunday was operating under transit restrictions, also allows access to some 200 private terminals. Meanwhile the ports of Freeport and Texas City were under condition "Yankee", with all inbound vessel traffic suspended at these ports. Source Reuters
How Baby Boomers’ Good Times Drive the Economy: Older Americans are emerging as major drivers of the economy. Their stock portfolios, retirement savings and paid-off homes have swelled in value over decades of growth. Hours once spent raising young children and working can now be devoted to golf, concerts and brunch. Today, Americans 55 and over control nearly 70% of U.S. household wealth, according to the Federal Reserve. In 1989, the first year of available data, they controlled just 50%. Their dollars amount to 45% of U.S. personal spending, according to Moody’s Analytics, up from 29% three decades ago. Boomer-rich Georgetown, Texas, has now been the No. 1 city for population growth for three years in a row, according to an analysis of Census Bureau data for cities with populations of at least 50,000. Georgetown Mayor Josh Schroeder couldn’t be more pleased. The seniors moving into the area are active and eager to spend. “It’s like they’re at college except they don’t have to go to class and they have $3 million in the bank,” said Schroeder. While migration South slowed in 2023 due in part to high mortgage rates that made it too expensive for many younger families to move, older households were less affected. People 55 and up made up 38% of the net gain in the six Southern states last year, up from 35% in 2021 and 2022. Source WSJ
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Apartments Could Be the Next Real Estate Business to Struggle: It might seem like a great time to own apartment buildings. For many landlords, it is. Rents have soared in recent years because of housing shortages across much of the country and a bout of severe inflation. But a growing number of rental properties, especially in the South and the Southwest, are in financial distress. Only some have stopped making payments on their mortgages, but analysts worry that as many as 20 percent of all loans on apartment properties could be at risk of default. Although rents surged during the pandemic, the rise has stalled in recent months. In many parts of the country, rents are starting to fall. And while homes remain scarce in many places, developers may have built too many higher-end apartments in cities that are no longer attracting as many renters as they were in 2021 and 2022, like Houston and Tampa, Fla. The issues facing apartment buildings are varied. In some cases, owners are struggling to fill units and generate enough income. In others, the apartments are full of paying tenants but owners cannot raise rents fast enough to come up with the cash to cover rising loan payments. Source NYTIMES
AI Pushes Google’s Emissions Upward: Google is bullish about AI helping to fight global warming, but it's also candid about the energy-thirsty tech driving up the company's own emissions for now. Google's corporate emissions rose another 13% last year and are up 48% compared to their 2019 baseline. That's partly because data centers serving AI and other applications are using more power. Last year's CO2 growth reflects the "challenge of reducing emissions while compute intensity increases and we grow our technical infrastructure investment to support this AI transition," the report states. Meaning Google - and likely other AI companies - face a tough climb to reach its 2030 net-zero goal. Source Axios
US Chamber of Commerce Urges Politicians to Prioritize Growth: The U.S. Chamber of Commerce launched a new agenda last week, telling politicians that economic growth should be the top issue in the 2024 election and beyond. The influential business group is telling elected officials to prioritize economic policies that could return U.S. economic growth to the 3%+ rates that prevailed in the second half of the 20th century—not the sub-2% growth economists project for the decades ahead. According to the Chamber, from 1950 to 2010, real economic growth in the United States averaged +3.4% a year, even with recessions. As a result, the 2010 economy was seven times larger than the 1950 economy. The population of the U.S. also grew during this period, but the economy grew faster. Real per capita GDP was more than three times larger in 2010 than in 1950. Since 2010, growth has averaged just 2.2% a year. Much of the slowdown is attributed to the decline in tailwinds, which had supported faster economic growth, including Baby Boomers entering the primes of their careers and more women joining the workforce. "We're in a place now where we don't have those tailwinds anymore. In some instances, they become headwinds," said Suzanne Clark, president and CEO of the Chamber. Sustained economic growth provides a foundation for broad-based prosperity. When our economy is growing at +3%, someone who is born today will see America’s economy double in size by the time they are in their early 20s. At +2% growth, it will take until they are in their mid-30s for the economy to double. Source US Chamber of Commerce
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