Wentz Weekly: Stocks Little Moved As Market Look Forward to A Quiet Week

Wentz Weekly Insights
Stocks Little Moved As Market Look Forward to A Quiet Week

Stock indexes were mixed last week but the average stock continues to struggle. Big tech/Mega cap stocks had another solid week, helping the NASDAQ finish positive, while the S&P 500 and Dow both finished down 0.1%. Despite small caps having a solid week with an outperformance of 1.3%, the equally weighted S&P 500 index lost 0.8%.

It was a quiet week that saw several corporate updates, most of which disappointed, along with the highly anticipated Trump/Biden debate, and more housing market and inflation data.

Despite what is typically a seasonally stronger part of the year, the housing market has been a disappointment lately. The past several months have seen slowing home sales, both for new and existing homes, as well as lower home building activity. In fact, the February through May period saw the slowest pace of existing home sales since 2011.

At the same time, inventories are up double digits over the past year with supply of new homes up 13% and supply of existing homes up 19% compared to this time last year, while mortgage rates have steadily declined since early May over the expectations of falling rates beginning later this year. The average prime 30-year rate was 6.86% last week, down from a 24-year high of 7.79% in October and the 2024 high of 7.20% in May. This is worth watching as a continued slowdown could domino into weaker economic activity.

The biggest disappointment on the corporate side was Nike and Walgreens. Nike stock dropped 22% last week as it said slowing sales have been due to slowing macro headwinds and more importantly due to their lack of innovation. Management talked about the company’s shift to re-focus on innovation and doubling the amount it spends by 2025, which will lead to weaker results over the next year but it expects to pay off after. Walgreens shares lost 24% over a weak forecast, weakening consumer, and it needing to close a quarter of its nonprofitable locations.

Separately, news that would have caused a big rally in stocks over the past year failed to do so on Friday. The PCE price index, which is the Fed’s most followed inflation reading, came in exactly as expected across the board – unchanged in May, with core prices up 0.1% and up 2.6% over the past year, moving closer to its target of 2%.

An “as expected” or better than expected report has consistently resulted in a rally for stocks and pullback in Treasury yields, but that was not the case Friday, where stocks fell 0.4% and the 10-year Treasury saw its biggest one-day increase in weeks, up 11 basis points to 4.40%.

However, it could have also been a reaction to the first Presidential debate from Thursday night. The bond market likely sold off due to worries over the impact of tariffs, taxes, the deficit, and rising Treasury issuance/supply. The stock market has not been worried about the election, but Thursday’s debate and Friday’s results may show that may be changing. All eyes will be on how Democrats respond after the widely held view that Biden failed to demonstrate he has the energy or ability to serve four more years.

This week is expected to be a very quiet week with markets closing early on Wednesday (at 1:00pm) and closed all day Thursday in celebration of Independence Day. There are no earnings or corporate events and data will focus on the labor market with the employment report on Friday which could be market moving.

The quarter ended with the S&P 500 gaining 3.47%, but Nasdaq outperformed with a 5.96% gain while the Russell 2000 underperformed with a 1.08% loss. Last week returns were pretty mixed with the major indices finishing as follows: Russell 2000 +1.27%, Nasdaq +0.24%, S&P 500 -0.08%, Dow -0.08%. Treasuries were mostly lower as yields moved higher – the 2-year Treasury yield rose 3 basis points to 4.77% while the 10-year rose 14 bps to 4.40%. Gold finished higher by 0.4%, the dollar index was relatively unchanged, Bitcoin dropped 5.9%, and oil rose 1.0% for the third straight weekly gain as geopolitics remains a concern.

Recent Economic Data

• New Home Sales: Another sign of a weaker housing market came from new home sales where sales of new single family homes fell a much more than expected 11.3% to a seasonally adjusted annualized rate of 619,000 in May, the largest monthly decline in two years. The sales rate is now 16.5% below the level from a year ago. The good news is inventory continues to improve with 481,000 new home currently for sale, up 1.5% from last month and up 13% from a year ago level of 426,000. Other good news is the median sales price has held steady from last month and down 1% from a year ago to $417,400 and down 9.3% from the peak in 2022.
• Case Shiller Home Price Index: The Case Shiller Home Price Index indicated home prices increased 0.3% in April, the same increase as March (and up 1.2% not accounting for seasonal adjustments). Of the 20 major cities tracked, 13 are seeing all-time highs in home prices. The index indicates home prices are up an average of 6.3% over the past year, down from March’s 6.5% annual increase. San Diego saw the fastest increase in home prices for the sixth straight month with a 10.3% annual gain, followed by New York’s 9.4% increase and Chicago’s 8.7% increase. The smallest increase continues to be in Western cities including Portland with a 1.7% and Denver with a 2.0% increase. Cleveland right at the top with a 8.5% annual increase.
• Durable Goods Orders: Orders of durable goods rose 0.1% in May, a little better than expected but slowing from prior months. However, the data wasn’t as good as the headline suggests with orders of core capital goods falling 0.6%, much worse than the 0.1% increase expected. The decline could be due to a large drop in communication equipment, other electrical equipment and machinery. The more important reading, as it is an input to GDP, which is shipments of non-defense capital goods excluding aircraft declined 0.5%, which should give us a downward revision to Q2 GDP estimates.
• Jobless Claims: Jobless claims for the week ended June 22 were at 233,000, a decline of 6k from the prior week with the four-week average seeing a slight increase at 236,000. The number of continuing claims was 1.839 million, an increase of 18k from the prior week for the highest number of continuing claims since November 2021. The four-week average increased about 12k to 1.816 million.
• Consumer Confidence Survey: The Conference Board’s consumer confidence index fell to 100.4 in June, down about one point from May, but held steady in the narrow range its been through the past two years, with current labor market strength outweighing concerns about the future. The survey compiles two other indexes – the present situations index which was relatively unchanged at 141.5 and the expectations index, which fell about 2 points to 73.0. A level below 80 typically signals a recession ahead, and this index has been below 80 for five consecutive months.
• Personal Income & Outlays: The personal income and outlays report showed that consumer income rose 0.5% in May, a little higher than the 0.4% expected and accelerating from April’s 0.3% pace. The largest and most important component, wages and salaries, increased 0.7%, a much faster pace than the 0.2% from April. Compared to a year ago incomes are 5.1% higher, with a 5.3% increase in wages/salaries. Meanwhile, consumer spending increased 0.2% in May, slightly lower than the 0.3% expected and matching April’s increase. spending on goods rose 0.2% while spending on services rose 0.3%. Over the past year consumer spending has risen 5.8%, driven by a 7.3% increase in services spending and to a lesser extent a 2.7% increase in goods spending. The savings rate increased slightly to 3.9% (from 3.7%), but still remains historically low, as compared to the 10-year average (excluding pandemic years) of 7.5%. The PCE price index, which is the Fed’s most preferred inflation reading, was unchanged in May as expected, with core prices up 0.1%, also as expected. The headline index has increased 2.6% over the past 12 months with core prices also up 2.6% over the past 12 months.
• Money Supply: US money supply (which includes cash on hand, deposits at banks, and money market balances) increased $93.2 billion, or 0.4% in May and is up $125.9 billion, or 0.6%, from a year ago. Money supply has now increased 7 consecutive months after declining 14 of the 15 months prior to that. Since the beginning of the pandemic money supply rose 41%, or $6.290 trillion, to a peak in April 2022, before falling 4.7% to a post pandemic low in October 2023. Since then, money supply is up 1.3%. The monetary theory of inflation is the belief that money supply growth is the cause of inflation, which is why inflation spiked after the pandemic, and now many think inflation will come roaring back if money supply continues to grow.

Company News

• Boeing & Spirit AeroSystems: A latest report from Bloomberg says Boeing’s potential acquisition of Spirit AeroSystems, maker of many of the 737 parts, would mostly be funded with stock rather than cash, which would ease some of the cash burn from Boeing. The stock offer would value Spirit at about $35/share, about a 9% premium to Monday’s share price, prior to the new report. The report adds an acquisition would require Spirit to spin off some of its manufacturing plants to Airbus. It was late Sunday evening that Boeing confirmed it would acquire Spirit AeroSystems for $37.25/share in an all stock deal that values Spirit at $8.3 billion. The deal will include all of Boeing-related commercial operations as well as some defense and aftermarket operations. As part of the deal, Airbus agreed to acquire certain commercial work that Spirit performs for Airbus.
• Broadcom’s New Chip With ByteDance: Broadcom and ByteDance, the parent company to TikTok, are collaborating to create an advanced AI chip in effort to secure a stable supply of the high end chips and to lower procurement costs, and to get ahead of the US export restrictions on advanced AI chips (to China).
• Apple Increasing Automation: Apple is instructing its managers to reduce the number of workers it has on its final assembly lines for iPhones by up to 50% over the next several years. The company is approving more automation projects for its assembly lines, which it had previously halted due to high up front costs, in effort to achieve this goal. The report by The Information said workers were confrontational and protested during the Covid lockdowns and over pay disputes which caused shortages of the iPhone and led to a sales decline that holiday season, something Apple is looking to avoid in the future.
• Apple Not Using Meta: After a Wall Street Journal report last weekend of Apple possibly partnering with Meta Platforms on incorporating its AI into the iPhones, Bloomberg then reported that Apple rejected Meta’s proposal on integrating its AI chatbot in Apple devices due to Apple’s claim Meta’s privacy practices are not stringent enough. Apple viewed ChatGPT as superior and announced the partnership with its creator OpenAI, and is also expected to partner with Google to integrate its Gemini services into its devices, according to the report.
• Slower Sales At Walmart: Walmart shares fell about 3% Tuesday after its CFO spoke at a brokerage conference and warned that the current quarter sales would not be as strong as last quarter’s sales. He added the current quarter comps (comparable store sales) will be the most challenging for the year, and the company is facing margin pressure with consumers shifting spending from general merchandise to food, which is lower margin, as well as rising wage pressure.
• US Steel Deal in Jeopardy: US Steel has seen consecutive days of declines and last Tuesday saw more declines after a small group of Democratic Senators sent a letter to the Biden Administration urging it to issue an executive order blocking Japan’s Nippon Steel pending acquisition of US Steel. This comes a month after a group of Republican Senators urged Biden to block the deal.
• Southwest Lowers Forecast: Southwest shares fell last Tuesday after saying based on revenue performance to date, it now expects revenue per available seat mile to decline 4-4.5%, a bigger decline than its prior expectations of 1.5%-3.5%. The reason for the downward guidance is due to complexities in adapting its revenue management to current booking patterns.
• Whirpool Takeover Speculations: Whirlpool shares were about 15% last Wednesday after Reuters reported that German engineering firm Bosch was considering a takeover bid for the company. The report says Bosch has been in discussions with advisors about possibly making an offer.
• Walgreens’ Rough Week: Walgreens shares were down around 25% last Thursday after a disappointing earnings report where it lowered its full year outlook, blaming a difficult backdrop for retail and the consumer, calling it “persistent pressures on the US consumer,” and certain dynamics which have “eroded pharmacy margins.” As a result, the WSJ reported and the company confirmed it will go through major store closures this year, with no decision on how many.

Other News:

• Fed’s Annual Bank Stress Tests: The Federal Reserve’s annual stress test of some of the country’s largest banks, 31 to be exact, revealed all the banks would meet their capital requirements in a hypothetical recession or a large economic downturn. The stress test showed all the banks would see larger losses than last year’s tests (due to riskier balance sheets and higher expenses) but they are still well positioned to handle the hypothetical severe recession. This will allow banks to increase shareholder returns, which banks can begin announcing as soon as this week.
• Presidential Debate: The first Presidential debate was held last Thursday and hosted by CNN. It was a different format than prior debates, with each candidates microphones muted until it was their time to talk and no audience present. The moderators asked questions on many topics including taxes, fiscal policy, tariffs, social security, Medicare, immigration, housing, childcare, healthcare, and geopolitics. There is a wide consensus that Biden was unable to demonstrate his ability and the energy to serve four more years, with Trump’s inability to answer any of the questions directly. The next big dates to follow are the Republican National Convention beginning July 15 and Democrats planned virtual nomination by an August 7 deadline to meet the Ohio ballot requirements.

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