Wentz Weekly Insights
Resilient Economy, Strong Consumer, and Lower Inflation Drive Stocks to New 52-Week High

Stocks saw another strong week of gains, driven by a lack of volatility, higher consumer sentiment and higher confidence in a ‘soft-landing’, softer inflation data, and a drop in bond yields. Stocks rose 2.42% (S&P 500) which was driven by growth stocks again, but there was broader participation than in recent weeks (a positive sign). Treasury yields gave up all their gains from the prior week with the 2-year note’s yield falling 21 basis points, settling at 4.75% with a weekly low of 4.60% and the 10-year note falling 24 basis points to 3.83% with a weekly low of 3.75% after reaching 4.10% the week prior.
The main event last week was the consumer price index that rose at a slower pace in June than expected. Inflation was a lower than expected 0.2% in June and rising at an annualized pace of 2.8% over the past three months. Over the past year, the index is up 3.0%, a sharp decline from the 40-year high 9.1% inflation rate the same month last year and the lowest annual increase since March 2021.
Over the past year energy prices are down 17%, used car prices are down 5%, health insurance down 25%, and airline fares down 19% (and egg prices are down 8%!). At the same time, inflation in many services related categories remains high – recreational services up 5.9%, transportation services up 8.2%, shelter up 7.8%, new vehicles up 4.1%, food at home up 4.7%, food away from home up 7.7%, and apparel up 3.1%. While categories are mixed, much of the slowdown in inflation is due to the base effect as high inflation readings from this time last year begin to “roll off” the 12-month comparison.
Brining inflation from 3.0% (or 4.8% for core prices) to the Fed’s 2% target will be much harder than bringing it from its high of 9.1% in 2022 to 3.0% in June. In addition, the categories where inflation remains highest – items such as shelter, transportation, medical, and other services – are typically the stickiest and hardest categories to get under control. The thought is if wage growth remains high, that will give fuel to these categories and will contribute to consistent inflationary pressures.
Inflation readings are expected to pick up over the next several months for the same reasons they were declining – the base effect – the comparison from a year ago will begin to look easier. If monthly inflation readings come in over 0.2% over the next several months, the annual inflation reading is expected to start re-accelerating again (due to high monthly readings from early summer a year ago “rolling off” the annual comparisons) which, without looking at the data with context, could come as a surprise to investors.
Markets are still expecting a rate hike at next week’s FOMC meeting despite the better than expected data, due to recent Fed speak that included several policymakers voicing their support of a rate increase, along with Powell suggesting this would be the case. Markets currently expect just that one rate increase this year before beginning to price in rate cuts by the first quarter 2024 (if inflation moves to target, which markets are optimistic about, why keep rates high and risk a recession?). As we move forward and with inflation data becoming more volatile, the Fed does not want to make the mistakes it made in the early 1980s when inflation appeared to be cooling and coming down to target only for it to reaccelerate.
There seems to be less concern in the markets over interest rates and potential future hikes, and more focus on the resilience of the economy and the continued strength of the consumer. This, assisted with the AI boom and sharp rise in mega-cap names, has driven stocks 17% higher this year and to the best levels in 15 months. However, the risk is that if the strength of the economy, consumer and labor market continues, that would mean inflationary pressures stick around for longer.
As mentioned last week, focus will shift to earnings with a bulk of S&P 500 companies reporting second quarter results over the next three weeks. Banks kicked off earnings last week with better than expected results as net interest income was much better than expected thanks to higher interest rates, but investment banking continues to be a weak spot along with larger builds in loan loss reserves (money set aside for potentially bad loans) which is on track to double from last year.
Earnings have declined for three consecutive quarters and going forward we believe there will be more focus on profit margins which have declined for six consecutive quarters with revenues estimated to decline slightly as businesses become less successful at passing on higher prices. This will be even more important as the markets trade at a much higher multiple, current trading at 20.6x last twelve month earnings and 19.3x forward earnings, versus the long-term average of 17.5x. In addition, with stock prices much higher, there is a higher bar for companies to clear versus the first quarter where expectations were so low.
Week in Review:
Markets saw an uneventful day on Monday to open the week. The mornings data included the NY Fed’s survey of consumer expectations that showed short-term inflation expectations came down to the lowest levels in 26 months but longer-term expectations moved to the highest level in 14 months, while consumer credit rose, driven by a 8.2% annualized increase in revolving credit. Fed speak included Cleveland’s Mester and San Francisco’s Daly both supporting further rate increases due to progress on core inflation stalling. Treasury yields moved lower at the short-end on the lower inflation expectations while stocks moved higher with the S&P 500 gaining 0.24%.
It was another quiet session on Tuesday but stocks were mixed after the NASDAQ 100 announced it would undergo a “special rebalance” for the third time in its history due to the significant outperformance and high weighting of the “magnificent seven” (the top seven names in the index). This will cause selling on the rebalance date of the largest names, leading to weakness in megacaps. Elsewhere, M&A was back in the spotlight after the Court decided to deny the FTC’s decision to block Microsoft from closing on its $68.7 billion acquisition of Activision Blizzard and European regulators giving the approval for Broadcom’s $61 billion acquisition of VMWare. US Stocks rose Tuesday and finished just off the best levels of the day with the S&P 500 0.67% higher and Treasuries mixed.
The most anticipated event of the week was the release of the consumer price index on Wednesday morning. Data showed inflation continued to come down in June, rising at a 3.0% rate over the past year while core prices were up 4.8% over the past year, both slightly lower than expected. The better inflation readings pushed bond yields lower and stock prices higher over the expectation of less rate increases and hopes for lower inflation going forward. WTI oil finished above $80/barrel for the first time since April, stocks finished just off the highs of the day with the S&P 500 up 0.74% and NASDAQ up 1.15%, while the 2-year Treasury yield fell 16 bps to 4.74%.
The producer price index release on Thursday morning further supported a cooling in inflation with results that were slightly lower than expected. Other news included James Bullard stepping down from his position as the President of the St. Louis Fed, who has been one of the more hawkish policymakers, and San Francisco’s Mary Daly further supporting a more restrictive stance in policy as the economy has seen further momentum. Meanwhile, momentum in the equity markets continued with the S&P 500 crossing the 4,500 mark for the first time since April 2022 with a 0.85% gain with growth stocks driving the rally as the NASDAQ gained 1.58% as yields on Treasuries fell sharply again.
Friday saw earnings reports from several of the largest U.S. banks including the world’s largest with JPMorgan beating results with strong net interest income growth and results that were helped by its acquisition of failed First Republic Bank. Meanwhile, consumer sentiment improved sharply through the first two weeks of July, reaching the best levels since September. Stocks were mixed on the day with the S&P 500 down slightly while value outperformed with the Dow gaining 0.33%.
Stocks had another strong week overall with bonds contributing as yields fell dramatically. Oil saw its third consecutive weekly gain, rising 2.1% to the mid-point of its eight-month trading range of $70-$80/barrel. The dollar index saw its worst week in eight months after declining 2.3% for the week while gold rose 1.7%. Bonds had a strong week as yields fell across the curve over less inflation worries with the Treasury 2-year note’s yield falling 21 basis points to 4.75% and the 10-year note yield falling 24 bps to 3.83%, giving up all the yield gain from the week prior. Stocks saw broader participation, though still looking for more participation, with the major indices finishing as follows: Russell 2000 +3.56%, NASDAQ +3.32%, S&P 500 +2.42%, Dow +2.29%.

Recent Economic Data

  • Inflation expectations, through several surveys, are continuing to come down. The NY Fed’s survey of consumer expectations showed inflation expectations over the next year are at 3.8%, dropping for the third consecutive month, the lowest level since the beginning of 2021 and down from 4.1% in the May survey. However, expectations over the longer-term (5-year) moved to 3.0% which was above the May survey of 2.7% and the highest since March 2022. Sentiment on the jobs market fell to the lowest in 14 months. The expected growth in spending over the next year was 3.2%, falling another 0.1% in the month.
  • Consumer inflation was 0.2% in June, up slightly from the 0.1% increase in May but lower than the 0.3% increase that was expected, according to June’s consumer price index. Inflation over the past year saw a 3.0% rate in June, slowing from the 4.0% annual increase in May and the lowest level of annual inflation since March 2021, however due mostly to high inflation readings from May last year rolling off the 12 month comparison. In addition, most of the slowdown in inflation is due to a 16.7% drop in energy prices, including a 36.6% decline in fuel prices. Other categories helping bring inflation lower include used car prices, down 5.2% over the past year and medical services, down 0.8% over the past year. More importantly, core prices, which exclude food and energy prices, rose 0.2% in June which was slightly below the 0.3% increase expected and down from the 0.4% pace in May, and the lowest monthly increase since August 2021. The annual rate in core prices was 4.8%, down from 5.3% in May. Important categories include shelter which is up 7.8% over the past year, transportation prices up 8.2%, vehicle insurance up 16.9%, hospital services up 4.1%, and apparel up 3.1%.
  • Producer prices for final demand increased 0.1% in June, slightly lower than the 0.2% expected but higher than the 0.3% decline in May. The index for producer prices is up 0.1% from a year ago, dropping substantially over the past several months and down from the 1.1% annual rate in May. Energy prices for producers picked back up by 0.7% while food prices saw a slight decline. Excluding trade services and these two volatile categories, prices were up 0.1% in June and up 2.6% over the past 12 months. The prices index for final demand services remains higher, rising 0.3% in the month driven by categories like transportation but offset by categories like warehousing. Over the past 12 month final demand services index is higher by 2.3%
  • The price index for goods and services imported to the U.S. fell 0.2% in June which follows a 0.4% decline in May and has declined 10 of the past 12 months. Fuel prices were up 0.8% in the month and import prices excluding fuel were down 0.4%, being driven by industrial supplies, consumer goods, and capital goods. The price index for imports over the past 12 months is down 6.1% for the fifth consecutive month of seeing an annual decline and coming after a record 13.0% annual increase March 2022. The price index for exports declined 0.9% in June after a 1.9% decline in May and also falling 10 of the past 12 months. The decline was driven by agricultural goods prices, which fell 1.6%, as well as declines in industrial supplies, which was offset by increases in capital goods, consumer goods, and vehicles. The price index for exports over the past year was down 12.0%, the steepest annual decline since the data started in 1984 and comes after a record high increase of 18.6% just one year ago.
  • The University of Michigan’s consumer sentiment mid-July survey resulted in an index level of 72.6 which is higher than the expectation of 66.0 and the best level since September. The sharp rise was attributed to the slowdown in inflation, stability in the labor markets, and sharp rise in equities. Furthermore, the index on current conditions was 76.5, up from 69.0 in June and the best level since October 2021, while the index on consumer expectations was 69.4, up from 61.5 in June and the best level since July 2021. The disappointing part is the expectation on inflation over the next year was 3.4%, up from 3.3% in June.
  • Consumer credit rose $7.24 billion in May, or at an annual rate of 1.8%, bringing the total amount of consumer credit (which does not include mortgages) to $4.865 trillion, and slowing from its 5.0% annual rate in April. Revolving credit (like credit cards) rose 0.7% to $8.5 billion in May on a seasonally adjusted basis (1.7% not seasonally adjusted), and is up 8.2% on an annualized rate, while still growing strong is lower than the 13.8% annualized rate the prior two month. Non-revolving credit, which is a much larger component making up 74% of all consumer credit, declined $1.3 billion, or 0.4% on an annualized basis.
  • The number of unemployment claims seen by the states for the week ended July 8 was 237,000, a drop of 12k from the prior week with the four-week average at 246,750. The number of continuing claims was 1.729 million, an increase of 11k from the prior week which was lowest since February, with the four-week average at 1.735 million.
  • Freddie Mac’s weekly mortgage survey showed the average prime 30-year mortgage rate was 6.96% last week, up another 15 basis points from the week prior, the highest since it hit 7.08% in November which was the highest since early 2000. The low this year was in February when the 30-year rate averaged 6.09%.

Company News

  • PepsiCo reported its quarterly results where its sales and earnings were better than what was expected, but this was largely driven by price increases. Its organic sales growth was 13%, beating expectations of 10%, however this was all due to higher prices as volumes declined 3% for its food business and declined 1% for its beverage business. Earnings were 17% lower from a year ago, but still beat expectations.
  • Banks reported solid results, most of which beat analysts expectations. JPMorgan saw its net interest income in the quarter rise 44% to $21.8 billion (beating expectations of $21.0 billion). This allowed the company to increase its net interest income forecast to $87 billion (up from $81 billion in the previous forecast). Its results were helped by its acquisition of the failed bank First Republic Bank but it had $1.7 billion in provisions for credit losses attributed to the bank, and another $1.2 billion for JPMorgan. It also noted strong results for consumer and community banking. Meanwhile, CEO Jamie Dimon made upbeat comments on the economy – it has remained resilient, consumer balance sheets are healthy, and consumers are still spending strongly but at a slower pace, while maintaining his warning risks remain and a recession is likely though is uncertain how severe it will be.
  • In a very crucial step for the deal, the US District Court denied the Federal Trade Commission’s motion for injunction to block Microsoft from closing on its $68.7 billion acquisition of Activision Blizzard. The court said the “FTC has not shown it is likely to succeed on its assertion the combined firm will probably pull Call of Duty from Sony PlayStation, or that its ownership of Activision content will substantially lessen competition in the video game library subscription and cloud gaming markets.” Shares of Activision Blizzard rose 10% the day of the Court’s announcement, closer to its $95 takeover price. Microsoft later offered to make a small divesture to meet the objections of UK regulators. Later in the week, as what somewhat expected, the FTC filed an appeal on the Court’s decision.
  • Broadcom’s pending purchase of VMWare was given a conditional approval by European regulators subject to commitments offered by Broadcom that would no longer raise competition concerns. Broadcom recently announced its intent to acquire VMWare for $61 billion.
  • Shares of Roku gained over 10% after it announced a partnership with Shopify where it will give merchants access to streaming users with shoppable advertising. The new feature will allow users of Roku to use a single click in an ad to learn about and purchase a product directly from their TV using Roku Pay, then return to what they were watching.
  • Salesforce stock gained after it announced it will raise its list prices for new and existing customers an average of 9% across its cloud services, the first increase in seven years.
  • Disney said it has extended its contract with Bob Iger as CEO by another two years, keeping him as CEO through 2026. In addition, Iger suggested the company may look at strategic options that could include a sale of its traditional TV assets, saying the company would take an expansive look at the business. Iger added, in his interview with CNBC, the current distribution model of its linear TV assets is “definitely broken” and it may not be core to Disney’s strategy anymore. Iger said it views ESPN differently than its other linear networks like ABC and FX.
  • Elon Musk said he has launched a new company xAI for the goal of understanding the “true nature of the universe” and what he believes will help humanity understand reality.

Other News

  • The NASDAQ 100 index (and index of 100 of the largest non-financial companies in the NASDAQ) will undergo a ‘special rebalance’ to adjust the weight of its 100 components due to the significant outperformance and high weighting of the “magnificent seven” stocks that include Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. It will take place before the market open Monday July 24. The index has only seen a special rebalance twice in its history – in December 1998 and May 2011. The weighting changes will be announced Friday and no stocks will be added or removed.
  • According to data from the International Data Corporation, global shipments of personal computers (PC) declined by 13.4% in the second quarter, the sixth consecutive quarter of declines, however not as large of a decline as feared and slowing from the 29% decline in shipments in the first quarter. PC demand has been weak since the post-pandemic economic reopening and now producers sit on a high amount of inventories after building inventories during the Covid boom that suddenly slowed sharply when the economy reopened.
  • Federal Reserve Vice Chair for Supervision released proposals that would address the recent bank failures and increase capital requirements in the financial system for some of the largest banks. Vice Chair Michael Barr said the new regulation will include how the Fed regulates and supervises liquidity, interest rate risk, and incentive compensation, as well as improving the speed and force of the Fed’s supervision.
  • Bloomberg reported China’s Central Bank is hinting at adjustments to some of its policy including the reserve requirement ratio and lending facility to provide more support for its economy, as well as easing property controls.
  • The Bank of Canada raised its policy interest rate by 25 bps to 5.0% which was as expected, and said it will continue it quantitative tightening. The statement noted inflation is easing but a stronger economy than expected, tight labor markets, and more momentum in demand are causing persistent inflationary pressures in services.
  • Fed updates:
  • St Louis Fed President James Bullard, who has been one of the more hawkish Fed members, said he will step down from his role effective August 14 to take a position as the dean of Purdue University’s business school.
  • Cleveland Fed President Loretta Mester said the economy has “shown more underlying strength” this year but inflation has been stubbornly high and progress on core inflation has stalled which supports her view more rate increases are needed. She also said sticky wage growth is one of the measure that still needs to be contained in order to achieve 2% inflation, something that suggests the Fed is aiming for an increase in unemployment to bring wage inflation down.
  • San Francisco’s Mary Daly said it has been surprising how strong the economy has remained and the stronger data indicates the Fed’s need to raise rates further to “bridle that economy more.” She still believes the risk of doing too little outweighs the risks of doing too much. Later in the week Daly said the economy is seeing a lot of momentum still, even after over 5% of rate increases, which is why she expects the Fed to continue with rate increases to keep fighting inflationary pressures.
  • Federal Reserve Governor Chris Waller said in his prepared remarks at a public event last week he sees two more rate increases over the four remaining FOMC meetings this year in order to continue the battle to bring inflation down to target. He added he supports a rate hike at the July meeting but if inflation data comes in better than expected he could see the Fed foregoing the second hike later this year. He said it will depend on the data but if the upcoming inflation reports “look like the last two, the data would suggest maybe stopping.” He went on to suggest that the tightening in policy that has already occurred (over 5% of rate increases) has already worked its way through the economy which means there is not much more slowing of demand left from tightening and pausing rate increases now would not make sense.

Did You Know…?

Record Prime Day

Data from Adobe Analytics show online spending rose 6.1% to $12.7 billion during Amazon’s two day “Prime Day” promotion, with Amazon calling it the biggest ever Prime Day that broke previous records. Amazon said consumers bought more than 375 million items over the two-day period, up from 300 million last year. Although the promotional period rose from last year, it was short of expectations of Adobe and analysts forecasts. Adobe forecasted online sales to grow 9.5% to $13.1 billion from $11.9 billion last year.

The Week Ahead

Markets will be focused on earnings the next three weeks as it will be the busiest of this earnings season with the number of earnings reports picking up this week with at least 10% of S&P 500 companies reporting second quarter results. Notable quarterly results will come from Bank of America, Morgan Stanley, Lockheed Martin, JB Hunt on Tuesday; Elevance (Anthem), Halliburton, Goldman Sachs, IBM, United Airlines, Netflix, Tesla on Wednesday, Taiwan Semiconductor, Johnson & Johnson, CSX on Thursday, and American Express on Friday. The economic calendar will include several reports on the housing market for the month of June including the housing market index on Tuesday, housing starts and permits on Wednesday, and existing home sales on Thursday. We will see updates on the manufacturing sector with the Empire State Manufacturing index Monday, June industrial production on Tuesday, and the Philly Fed manufacturing index on Thursday. Elsewhere, data on June retail sales comes out Tuesday where economist and analysts estimate a 0.5% increase in sales, and 0.3% increase in core sales (excluding gasoline and food sales), as well as jobless claims on Thursday. Another item on the calendar is the Senior Loan Officer Opinion Survey on Bank Lending Practices, which became more important after the bank failures in April and May and provides additional insight to banks’ lending conditions. We will not hear from any Fed member this week as policymakers are in a blackout period prior to the FOMC’s next meeting on July 26.