Oak Harvest: Weekend Update 7/10/2023
Equity markets dropped last week as a solid run of economic data stoked the higher-for-longer interest rate narrative.
The S&P 500 fell -1.2%, with materials and health care lagging, while banks held flat. The S&P 500 ended Friday at 4,399, down from the prior Friday’s closing level of 4,450. The move came in a shortened week as the US stock market closed three hours early on Monday and remained closed on Tuesday for Independence Day. The S&P 500 closed the first half of 2023 with a gain of 16%, including a +6.5% jump in June. The S&P 500’s performance in the first half of 2023 was its best since 2000, and similarly was led by the index’s top technology companies. The top contributor this year, Apple, closed last week with a market cap of $3tn, which exceeds the aggregate market cap of the entire Russell 2000.
Jitters returned last week as minutes from the FOMC’s June meeting said while the majority of the policy-setting committee members favored holding the key rate steady last month, “some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal.”
For the government economic data inclined, last week’s data leaves July rate hikes on the table and also reinforced that rate cuts are still a long way off. U.S. 10-year Treasury yields rose above 4% again last week, while the 2-year ticked above 5% nearing a hair of the high set in March. On the data front, U.S. payrolls rose less than expected 209k in June, which provided relief given a massive result in the ADP report earlier in the week. Job growth is cooling, but wage growth is proving sticky, up 0.4% in June, or 4.7% annualized over the past three months. U.S. services ISM rebounded to 53.9 in the month, back firmly into expansion territory.
All but one sector fell last week. Health care had the largest decline, falling -2.9%, followed by a -2.0% decline in materials and a -1.5% from in technology. Consumer staples and industrials were also down by more than -1% each. Real estate was the lone sector in positive territory for the week. The health care sector’s decliners included shares of UnitedHealth Group (UNH), which fell -4.0% last week as JPMorgan Chase lowered its price target on the stock to $527 from $562. The firm kept its investment rating on the shares at overweight. The decliners in the materials sector were led by Martin Marietta Materials (MLM), which fell -4.7% amid an investment rating downgrade to neutral from overweight by JPMorgan Chase even as the firm raised its price target on the stock to $470 per share from $450. Steel Dynamics (STLD) was another decliner in the materials sector as its stock also received an investment rating downgrade. The shares fell -3.5%.
On the upside, the real estate sector’s gainers included Simon Property Group (SPG), which received an investment rating upgrade to outperform from peer perform from Wolfe Research. Shares climbed +2.7% on the week.
Second-quarter earnings reports will begin this week from companies including PepsiCo (PEP), UnitedHealth Group (UNH), JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C).
Sideline notes:
As an “emerging markets economy” with an almost unlimited labor force, China’s economy, which is commodity dependent, is experiencing deflation not inflationary issues. June wholesale prices there were unchanged, and the core rate slowed up +0.4% month over month. Annual producer prices sank -5.4% last month, a ninth-straight decline and the steepest since December 2015. Treasury Secretary Janet Yellen visited China as the U.S. looks to reset its relationship with the world’s second-largest economy.
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Read the Oak Harvest Weekly Stock Talk: 2nd Half Outlook, The Old Normal Part 2. Down the Up.
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