Decision Time

We titled last week’s update “Stall Speed” after a strong 2-month rally from the June 16th lows. Sure enough, equity market momentum fizzled last week into option expiration. While the S&P 500 added 0.1% Friday, it was a very mixed bag. Declines in technology and materials offset gains elsewhere. The economic data was mixed. Jobless claims were lower and industrial production higher, offset by bad home sales, building activity and flat retail sales. The S&P 500 is up 16% from its mid-June lows. This leads us to a summary – “What’s hot and what’s not”.

Hot: Technology and consumer discretionary have roared back. Gains have been in the 25%-to-40% range since the lows. These were the worst hit during the valuation reset. While these sectors have seen momentum turn, they are still down double-digits on the year.

Warm: Industrials are up by double-digits and are close to flat on the year. This is a big outperformance by a cyclical sector given recession concerns.
Tepid: Outside utilities, defensives have been a mixed bag. Consumer staples performing in-line while health care has lagged.

Cold: Financials have stabilized after selling off earlier in the year. However, an inverted yield curve, declining housing markets and economic slowdown hasn’t helped performance. On a year-to-date basis, most financial groups are still down notably in 2022.

Frigid: Energy and commodities have given back much of its earlier performance strength as oil prices fell back below $90. Broader commodity prices have come down big ex natural gas. Sectors topping the inflation trade have been hardest hit with the ‘peak inflation” trade of recent months.

Chart wise: While the S&P500 touched just underneath its 200-day moving average and “failed” last week. Little should be made of this chart action. This is quite normal in both extended bear markets and early bull market recoveries. Chartists should know much more by month end close in one week and September’s first half action.

The bear case for stocks is the following: The Fed is a long way from 2% its target inflation. This process will be slow even if we’re past the peak inflation. We will only get there with more tightening and more meaningful economic slowdown. The 2s10s yield curve remains well inverted 31 Bps. Chart resistance is overhead with the 200-day moving average around 4320 on the S&P 500.

The bull case for stocks is the following: See our podcasts since mid-June and July 1st’s, “Opportunity Knocks Early”. Periods past inflation peaks have been some of the best on record for returns. There is still a lot of bearish sentiment and positioning to unwind with current readings from Investors’ Intelligence, AAII and Conference Board showing attitudes usually consistent with market lows. A slower Fed could be fuel for stocks in late 2022.

Stock Talk Podcast: 2nd Half Outlook Part 2-Where do we go from here?

https://www.youtube.com/watch?v=rVNWhyd02OA

News or Noise: Does the CPI (Consumer Price Index) Report Affect the Stock Market?

https://www.youtube.com/watch?v=uY9YdPbUFGc&list=PLxj0FBH5Bt8vxmPI12L9xWcpoVMX7jqvZ&index=35

 

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