Week in Review
US stocks rallied once again, with both the S&P 500 and the Nasdaq Composite jumping more than 3% last week. The Dow Jones Industrial Average is now down only 7% for the year. Treasury bonds closed relatively flat after a volatile week. The US Dollar index fell for the third week in four, continuing to provide a tailwind for both equities and commodities. Crude rebounded above $90 per barrel. Gold rose for the fourth straight week and is down less than 1.5% for the year. Crypto markets joined in the rally, with Bitcoin up nearly 5%.
Inflation readings during the week came in lower than expected. Falling energy and transportation prices helped drive year-over-year CPI down to 8.5% from June’s 9.1% peak. Sequentially, CPI was flat. Producer prices confirmed the slowdown, with prices down 0.5% month-over-month. Federal Reserve officials are reticent about declaring victory over inflation, and several FOMC members pushed back against forecasts of rate cuts in 2023. Futures markets imply a year-end Federal Funds rate between 3.5% and 3.75%.
This year’s market selloff has not been matched by a decline in earnings expectations. That’s driven the S&P 500’s forward price-to-earnings ratio from a historically elevated level of 23x to less than 16x, which more closely aligns with the average over the last 30 years.
Growth-oriented sectors have driven the short-term rally, but breadth in those areas remains the weakest on longer-term timeframes. Only 15% of Communication Services stocks are above their 200 day. The most defensive sectors are in a stronger technical position: Utilities and Consumer Staples have 90% and 70% of members above long-term averages, respectively.
Retail companies are in focus this week as we wrap up the bulk of the second quarter earnings season. Investors will likely be focused on management assessments of current inventory levels and details on how consumer demand is weathering inflationary headwinds. The economic data schedule is light. Housing Starts, Building Permits, and Industrial Production reports on Tuesday will give us an update on fixed investment activity, while Wednesday’s Retail Sales report should provide some insights on consumption. On Thursday, of course, we’ll see weekly jobless claims as usual. Those are worth keeping an eye on, as they’ve been moving the wrong direction for months.