Market Note – August 20, 2024

By Hightower Great Lakes on August 20, 2024

The Bounce Back

Last week’s economic data helped markets reverse course and have their best week since November 2023; the S&P 500 rose 3.93% and the Nasdaq gained 5.29%.

There were many reasons for the snapback – the Bank of Japan walked back its intention to raise interest rates, and we received better-than-expected economic data points in the U.S. and a clear line of sight on a new rate-cutting cycle from the Federal Reserve. 

July’s consumer price index (CPI) and produced price index (PPI) both beat expectations, rising 2.2% y/y, and 2.9% y/y respectively. The CPI print was the lowest since March 2021, and the Core CPI was its lowest since February 2021.

Initial jobless claims also came in lower than expected which helped ease labor market concerns, and retail sales from the government series were 4x higher than consensus expectations. 

Walmart’s (WMT) second quarter earnings results topped consensus along with the company raising full-year estimates. U.S. same-store sales rose 4.2% – confirmation the consumer remains healthy. 

The management team noted they saw no deterioration of the U.S. consumer in the quarter, and they continue to take share across all income levels, especially higher-income consumers.

In addition, it was notable to see in a new 13-F filing from Warren Buffet’s Berkshire Hathaway (BRK.B) that they hold conviction in the U.S. consumer through a new $200 million position in Ulta Beauty (ULTA), which was opened in the second quarter.

Although a small position in the portfolio (BRK.B owns ~$84 billion worth of AAPL shares), a new position in the company appears as a bet on a healthy and improving U.S. consumer.

And finally, Bill Ackman’s Pershing Square bought a new position in Nike (NKE). These are high-quality, important companies and it was good to see strong support for them. 

Chart 1: Initial Jobless Claims are Slightly Above the Two-Year Average and 150K Claims Below the 10-Year Average[1]

Management Under Pressure to Deliver

This earnings season has shown that investors are demanding companies more than ever to deliver strong results – and management teams are under pressure.

Companies in Q2 2024 that have reported a negative EPS surprise (did not beat estimates) have seen an average price decrease of -3.8% from the two days before the earnings release to two days after the release.

This is greater than the five-year average of -2.3%, as higher interest rates and valuations are putting more pressure on CEOs to deliver.[2]

Last week saw one of the largest CEO shake-ups in quite some time, as Brian Niccol, Chipotle’s (CMG) former CEO, departed the firm to join Starbucks (SBUX). Niccol excelled at CMG, bringing innovation and higher prices without shocking demand.

CMG’s stock rose by over 700% percent during Niccol’s tenure with the company since March 2018, and he now faces a large feat in returning value to SBUX shareholders.

SBUX has struggled with passing through higher costs, a China segment delivering poor results, and an overall lack of innovation. The announcement of his hiring boosted investor excitement about SBUX –the stock rose 24.5% last Tuesday for its best day ever. CMG fell -7.5% on the news.

Chart 2: Before Niccol’s Hiring, SBUX Has Lagged the Broader Market by Over 100% in the Last Five Years[3]

Fixed Income

The Treasury curve bull flattened last week with the 2-year flat at 4.05% and the 10-year pushing lower by 6 bps to 3.88%, leaving the 2s10s slightly more inverted at -17 bp. Muni yields were lower across the curve, falling 1-2 bps on the week.

Wall Street is betting that Fed Chair, Jerome Powell will confirm that interest rate cuts are coming at the Central Bank’s annual Jackson Hole meeting this week. With Fed Futures pricing in a 100% of a 25 bp cut and a 26% chance for a 50 bp cut, the markets could act with some volatility if Powell does not reinforce the Fed’s expected path ahead.

U.S. credit ratings deteriorated last week as the main rating agencies issued 45 downgrades and 24 upgrades. Communication Services had the most downgrades, while Consumer Discretionary had the most upgrades.

High-yield issuers led the downgrades with 26. U.S. Investment Grade spreads tightened 7 bps to +133 bps. U.S. High Yield spreads tightened 16 bps to +375 bps, back to levels seen before the volatile moves in the market two weeks ago.

After pulling in $53 billion in the week ending August 9, money market funds collected another $28 billion last week, lifting total money market assets to a new record high.

The Week Ahead

Earnings – Monday: EL, PANW; Tuesday: KEYS, LOW, MDT; Wednesday: A, ADI, SNPS, TGT, TJX; Thursday: INTU, NDSN, ROST.

Economics – Wednesday: BLS Payroll Guidance (Preliminary), FOMC Minutes; Thursday: Initial Claims, Continuing Jobless Claims, PMI Composite (Preliminary), Markit PMI Manufacturing (Preliminary), Markit PMI Services (Preliminary), Existing Home Sales SAAR; Friday: Building Permits SAAR (Final), New Home Sales SAAR, Jackson Hole Economic Symposium.

Return for Selected Indices^[4]

Click here to read last week’s Market Note (8/13).

Disclosures

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[1] Source: FactSet. As of August 18, 2024.

[2] Source: FactSet. As of August 16, 2024.

[3] Source: FactSet. As of August 18, 2024.

[4] Source: Bloomberg. As of August 19, 2024.