Market Note – August 22, 2022

By Hightower Great Lakes on August 22, 2022

Explaining the Recent Stock Market Rally

The S&P 500 has gained 15% since its lows in June. The rally was generated off of extreme bearish sentiment, plus better-than-expected economic data and earnings. The information we gathered from economic data and corporate earnings do not indicate a current recession, and they also do not indicate a likely Fed pivot.

Sentiment in June was overly negative, with headlines, economists and market pundits fueling recession fears and some calling for deep new lows in the S&P 500.

Economic data thereafter highlighted business activity expansion, plus moderating supply chains and labor market tightness. The economic data did not signal a current economic recession and showed insufficient progress on inflation to induce a Fed pivot.

Strong consumer data has included retail sales expanding sequentially in July, and now +10.3% y/y, and retail sales ex-autos +12.3% y/y. This is consistent with retailers citing robust, broad demand – emphasized in higher same-store-sales and total revenues figures.

Strong Retail Sales Highlights Consumer Strength¹

ISM surveys noted manufacturing and services activity continued expanding in July. Regional series are mixed, but the national indicators are encouraging. The latest Philadelphia Fed Index was much better than expectations and included better sentiment and higher capital spending expectations.

Supply chains are easing, and broad demand remains healthy. Cisco (CSCO) stock rallied from the company announcing supply chains easing in China, related to semiconductors, and industrial production grew +7% annualized in July, double the expectations.

The end to a long demand-pull bull market in the economic-leading semiconductor industry is something we’re watching. Demand may come under pressure as a result of double/triple-ordering, greater capacity and easing supply chain challenges. We discussed the semiconductor industry in detail in last week’s Weekly Wisdom.

The jobs market also remains strong, with job openings continuing to outpace the number of persons unemployed. While initial claims have risen from lows, they remain at overall low levels and have not risen sharply. This could change as the Fed continues to tighten aggressively into a slowing economic cycle.

Where the Fed has been effective taming demand is tied to housing. We’re seeing housing markets roll over in the form of sales, construction and permits. Prices are still up 20% y/y according to the S&P/Case-Shiller Home Price index.

There is a multiplier effect from housing that takes place in the form of furniture, appliances, electronics, tools, garden and auto sales – areas of moderating demand and easing supply chains.

The Fed: Live from Jackson Hole This Week

We don’t expect the Fed to pivot, and a heavy volume of “Fedspeak” from Jackson Hole later this week should support an aggressive Fed narrative. The Jackson Hole Symposium, where Chair Powell speaks at 10am ET on Friday, stands in stark contrast to last year’s event, where inflation was still considered transitory.

Fed Chair Jim Bullard commented last week that the Fed “should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation,” and said, “I would lean toward the 75 bps at this point [in September].”

Rents, wages, energy and food are all much too high. Most importantly, core PCE, the Fed’s preferred inflation measure, gets released Friday, with expectations for +4.7% y/y (vs. the Fed’s 2% target).

Elevated PCE Data Expected to Remain High, July Data Released August 26²

Even if we’ve peaked, inflation remains too high. Whether the Fed raises rates by 50 bps or 75 bps in September is less relevant, in our opinion. The Fed has continued to shed any doubt that they will continue tightening, even into a slower economic cycle.

The Fed’s rate increases have a lag effect of 6-9 months, which means the economy has not fully absorbed the impacts of the first Fed rate hike from March.

The July FOMC minutes released last Wednesday gave no indication of the future rate hike timeline, and instead, reaffirmed they will remain data dependent to determine the September move. Following the release, yields moved higher while the curve moderately flattened.

The 2s/10s spread tightened to -26 bps after reaching -46 bps on Tuesday, while credit spreads widened for the first time since early July.

Muni yields moved decidedly higher on the week after lagging Treasuries rose throughout most of the month, rising 43-66 bps on the short end, and 18-40 on the intermediate/long-end; the Muni yield curve is now inverted from 3-months (2.27%) to 6-years (2.22%).

Earnings Pretty Good

With just about all S&P 500 companies having reported, the growth rate remains impressive at +10.3% y/y. Expectations are for +5.5% y/y in Q3 and +8.5% y/y in Q4. The numbers are impressive given the mixed macro trends.

A Lens Outside the U.S.

In the UK, CPI surged to 10.1% y/y in July – up from +9.4% in June and the highest level since February 1982. Similarly, Germany recorded the biggest rise in producer prices in July – both on a month-over-month and year-over-year basis.

The EU is clearly vulnerable from its exposure to energy markets and the Russia/Ukraine war. Higher European rates are dragging U.S. rates higher and pervasive energy security concerns are likely to contribute to broadly higher fuel and power costs.

Not all central bank rates, however, are moving higher. China’s central bank cut interest rates after economic data flashed warning signs for the region. Switzerland, Indonesia, Russia and Turkey are a few more countries all maintaining accommodative monetary policy.

Berkshire Gains Approval to Acquire up to 50% of Occidental

Warren Buffett’s Berkshire Hathaway (BRK) has been buying shares of Occidental Petroleum (OXY) since February, days after Russia invaded Ukraine.³ BRK currently owns roughly 20% of OXY total market value.

Last week, the Federal Energy Regulatory Commission (FERC) approved via filing an authorization for BRK to purchase up to 50% of OXY common stock. The prior approval threshold was 25%.

BRK’s purchases of OXY shares have appeared friendly, with OXY welcoming the significant purchasing volume. Shares of OXY have risen +147% year-to-date.

The Week Ahead

Earnings – Tuesday: MDT, SJM. Wednesday: NVDA, CRM. Thursday: ULTA, DG, DLTR.

Economics – Monday: Chicago Fed National Activity Index (July). Tuesday: Markit PMI Services and Manufacturing (August), Richmond Fed Index (August). Thursday: Kansas City Fed Manufacturing Index (August). Friday: Personal Consumption Expenditures (July), Personal Income (July), Wholesale Inventories (July).

Return for Selected Indices⁴

		% Change
Index Name	End of Week	Week	Month	YTD
S&P 500 INDEX	4,228	-1.16%	6.95%	-10.40%
NASDAQ COMPOSITE	12,705	-2.58%	6.90%	-18.36%
DOW JONES INDUS. AVG	33,707	-0.05%	5.98%	-6.02%
RUSSELL 1000 INDEX	2,324	-1.41%	6.87%	-11.33%
RUSSELL 2000 INDEX	1,957	-2.90%	7.20%	-12.14%
FTSE 100 INDEX	7,550	0.91%	4.75%	5.15%
HANG SENG INDEX	19,773	-1.88%	-5.20%	-13.34%
NIKKEI 225	28,930	1.34%	4.52%	1.60%

				% Change
Index name	YTW	Spread	Duration	Week	Month	YTD
U.S. TREASURY	3.23%		6.50	-0.70%	0.15%	-9.24%
U.S. AGGREGATE	3.74%	+51 bps	6.64	-0.89%	0.53%	-9.70%
U.S. CORPORATE INV. GRADE	4.58%	+136 bps	7.77	-1.23%	0.77%	-12.96%
U.S. CORPORATE HIGH YIELD	7.73%	+450 bps	4.67	-1.21%	2.81%	-8.78%
U.S. MUNICIPAL BOND INDEX	3.14%		5.93	-1.21%	-0.32%	-7.89%

Click here to read last week’s Market Note (8/15).

SOURCES

¹ Source: FactSet (chart)
² Source: FactSet (chart)
³ Source: Reuters
⁴ Source: Bloomberg

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.