- On Sunday, Democratic Presidential nominee Biden dropped out of the race. No Presidential candidate has ever dropped out this close to the election, leaving no real precedent for us to draw upon for guidance. As of this writing, it is unclear who the Democratic nominee will be, although Biden and other prominent Democrats have endorsed Vice President Kamala Harris. The Democrats have less than a month to identify and agree upon a replacement, as the nominating convention is scheduled to take place on August 19 in Chicago.
- Our initial take is that Biden’s exit may make the Presidential election more competitive, making the subsequent economic and market impacts more uncertain. Importantly, the chances of a split Congress and better performance by Democrats “down ballot” could make gridlock more likely, leading to less impactful policy changes than in a Republican sweep.
- Last week, equity markets continued a massive sector rotation which began the prior week. Small caps continued to gain ground (up 3.5%), while technology sold off (-2.3%). The YTD gap between small caps and tech is now “only” 10 percentage points (9.2% vs. 19.5%), compared to more than 20 percentage points at the beginning of July. We have for some time advocated that the large cap tech names seemed to running too far ahead of fundamentals, but we acknowledge the speed of the reversal has been very swift.
- Looking by sector, energy and financials were the biggest gainers last week, while communication and tech were the biggest losers.
- For the year to date, all equity sectors are higher, with info tech and communication still leading the way.
- In tech news, an unprecedented IT outage from a software update to Microsoft (MSFT) operating systems by security service provider CrowdStrike (CRWD) caused system crashes globally. Earlier in the week, semiconductor stocks ASML Holding (ASML) and Taiwan Semi (TSM) comfortably beat estimates, but provided disappointing guidance amid high expectations. As well, they were weaker following reports that the Biden Administration is considering more severe Chinese trade restrictions to ASML and other technology-sensitive chip equipment providers. Netflix (NFLX) posted a tepid earnings beat, as it report higher-than-anticipated subscriber adds along with lower-than-expected revenue guidance. Amazon (AMZN) held its most successful Prime day event in history, with sales up 11%. ChatGPT owner OpenAi was revealed to be in talks with Broadcom (AVGO) to develop chips with plans to face-off against Nvidia (NVDA). Alphabet (GOOGL) is reported to be in talks to acquire Wiz for $23 bn, while Meta (META) was rumored to be acquiring a minority stake in giant eyewear manufacturer EssilorLuxottica (ESLOY) in attempt to secure smart glass manufacturing capabilities.
- In other corporate news, large financials including Bank of America (BAC), Goldman Sachs (GS), BlackRock (BLK), Morgan Stanley (MS), and US Bancorp (USB) all reported in-line results. Positive earnings surprises were reported by State Street (STT), Progressive (PGR), Discover Financial (DFS), Johnson & Johnson (JNJ) and Intuitive Surgical (ISRG), while Charles Schwab (SCHW), Kinder Morgan (KMI) and Domino’s Pizza (DPZ) led disappointments. Activist investor Starboard took a 6.6% stake in dating-app company Match Group (MTCH), while the WSJ reported Elliott Management built a significant stake in Starbucks (SBUX).
- It was a relatively slow week for macro data, with only June retail sales of note. Retail sales were flat, beating estimates for a decline of -0.3% MoM. Excluding the volatile auto and gas categories, retail sales rose by 0.8%, also beating the estimated for 0.2%. The import price index was unchanged (0.0%), compared to the forecast -0.2% decline.
The Week Ahead
- Earnings season kicks into high gear, while the most important macro data of the week will include June personal income and spending, and PCE. June PCE data should show further progress on inflation, as indicated by the already-released CPI data for June. June headline PCE is forecast to be flat (0.0%) MoM, while core PCE is estimated to rise by 0.1%. On a YoY basis, headline PCE is estimated at 2.4% while core PCE is forecast to be 2.5%, compared to 2.6% in May.
- June personal income and spending figures are expected to show a moderation in the pace of consumer spending. June personal income is forecast to increase by 0.4% MoM while spending rises by 0.3%, compared to 0.5% and 0.2%, respectively, in May.
Market Summary – Returns and Yields
For additional insights, be sure to check out last week’s blog post.
Definitions, sources, and disclaimers
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
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