Week of Jul 25, 2022
Tuesday, July 26, 2022
Macro: Consumer Confidence Index; New Homes Sales-Units; Monthly Home Price Index
Company Earnings: Microsoft; Alphabet; Visa; Coca-Cola; McDonald’s
Wednesday, July 27, 2022
Macro: Fed Funds Target Rate
Company Earnings: Facebook (Meta); Boeing; Shopify; O’Reilly Automotive
Thursday, July 28, 2022
Macro: Jobless Claims; GDP
Company Earnings: Apple; Samsung; Pfizer; Merck;
Opening remarks on July 25, 2022
Inflation: Up until Q3-2021, the central banks around the world had the view that inflation is transitional. Around the time Russia invaded Ukraine, it became clear that inflation is not transitory, not only because of the invasion but because of other factors being more persistent. in Q1-2022, Fed started to hike rates with the expressed intention that inflation should be curbed at all costs. It appeared that Fed is using the model that was used in the early 1980s.
Prior to Fed’s July meeting, the market is expecting a 75 bps increase, with either a 50 or 20 bps increase in September. Most investors believe that the target rate will not exceed 3%. Two reasons are mostly cited for this: 1) we will enter a recession and Fed has to reverse course, and 2) rate hikes, combined with restoration of supply chain will address the inflation. At GGC, we don’t believe that a recession will necessarily result in a rate hike because if Fed is set on demand destruction, they should allow a recession (and not a shallow one) to run its course and result in higher unemployment.
It appears that more investors accepting the fact that inflation is here to stay and that the recession is inevitable.
GDP: Q1-2022 GDP print was at -1.6%, with the expectation that Q2-2022 will also be negative. Two consecutive quarters with negative GDP growth constitute a recession. But are we really in a recession? This is the question that many experts are trying to answer, and what makes it complicated is the financial position of the consumers (with high savings that is way above what is expected during a recession), which means that the purchasing power will not be severely impacted.
Volatility: Volatility, as measured by CBPO VIX Index has been declining since a peak in mid-June 2022. However, we’re right before earning report of large corporations, the Fed’s meeting, and the GDP report for Q2-2022. At the start of our chronicle, VIX is below 30, which indicates lower volatility. At this point, it appears that the market has accepted a shallow recession, rate hikes up to 3%, and expectations that stock valuation does not slide significantly below the current level. That being said, there are talks that the policy rate might go as high as 4% by year-end, we will have a hard landing, and the markets will go even lower. Any of these might cause volatility to rise.
Source: Yahoo Finance!
Stock Markets: On the first day of our chronicles, S&P500 is at 3,966, down ~17% from Jan 3, 2022 highs of 4,796. On June 16, 2022, the S&P500 was down to 3,666 (i.e. 23% from the highs of Jan 2022), but the markets have picked up since then.
S&P 500 Index with regression line.
Source: Yahoo Finance!
Tuesday - July 26, 2022
Consumer Confidence Index, published by The Conference Board, was 95.7, which is below the expected 97. This is in line with Consumer Sentiment Index, published by Michigan University. For the complete report, click here. At GGC, we believe that a recession will cause consumer confidence to drop, but we don’t believe there is a meaningful relationship between the two, since consumer confidence might be impacted by other factors. We didn’t find meaningful correlation between consumer spending and consumer confidence.
Wal-Mart's earnings report showed a slowdown in sales, resulting in a drop in the share price.
Shopify announced that it will cut 10% of its workforce (primarily in sales and marketing), resulting in a drop in share price.
Alphabet (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT) both met analysts’ expectations, resulting in increases in their share prices during the after-hours session by ~5% and ~4%, respectively. This was definitely a relief for investors specifically because the revenues met (or marginally exceeded) the expectations.
Wednesday - July 27, 2022
Federal Reserve announced 75 bps increase in the target rate at 2 pm EST. Immediately after the announcement, the markets reacted positively with S&P500 index going up by 2.6% by the end of the session.
Chairman Powell repeated multiple times that their ultimate goal is to reduce inflation and they will only stop when the core inflation is contained or they have reliable evidence of imminent reduction in inflation. Although he didn’t say it directly, he implied that neither high unemployment nor recession will stop the Feds from rate hikes.
Facebook (Nasdaq: META) missed analysts’ expectations. the share price dropped by 4.6%.
Thursday- July 28, 2022
Markets rallied for the second day after the Fed’s announcement of 75bps rate hike. The interesting point is that the majority of investment professionals are of belief that this is a bear market rally. With that, the question is: who is buying these shares? According to WSJ, it’s primarily individual investors who are moving the markets higher.
Will they be hurt when the Fed will raise the rates again in September (75bps or 100bps), which combined with high inflation and the fact that they have not made any money, forcing them to liquidate their positions? That remains to be seen.
GDP print came out today indicating a negative growth of 0.9% for Q2-2022. So, this is the 2nd consecutive quarter with negative growth, which has been historically used as an indication of a recession. That being said, many, including Chairman Powell and Secretary Yellen do not believe that we’re in a recession.
Friday- July 29, 2022
Markets continued to rally today. with S&P500 closing at 4,130, which is 209 points (or ~5%) higher than the lows of 3,921 on Tuesday, July 26, 2022. Again, this rally has come as a surprise to many institutional investment professionals.
As per the Bureau of Labor Statistics (www.bls.gov), the ECI (Employment Cost Index) “increased 1.3%, seasonally adjusted, for the 3-month period ending June 2022.” This is significant, because Fed considers ECI as an early indicator of inflation. In other words, so long as ECI is increasing, we’re in the self-perpetuating cycle of inflation (that is, higher wages increase the prices, and higher prices result in demand for higher wages.) Click here for the full report.