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Market Summary
U.S. equities finished mixed on Thursday, as investors digested a fresh batch of earnings results and economic data. Futures pointed to a slightly higher open, with stocks rallying in the morning hours. The major indices were unable to hang on to the gains, however, as stocks ended near the lows of the session. Energy, financials, and industrials were the day’s leading sectors.
In a theme that’s been fairly common this year, the Dow (+0.08%) held up best as it has on the many bearish days this year. The index also climbed above its 200-day exponential moving average earlier this week, climbing out of correction territory in the process. Isn’t that something – after all the chaos this year, the Dow is back within 10% of its all-time high.
The S&P 500 (-0.07%) ended fairly flat, holding firmly above the June high as well as its own 200-day EMA. As tech stocks wavered, the Nasdaq (-0.58%) posted minor losses as we head into the end of week. Volume was up on the Nasdaq relative to yesterday’s action.
The VIX Index (+2.13%) rose after breaking below 20 yesterday, a level not seen since earlier this year in April. With stocks rallying in a convincing manner, volatility has dramatically subsided. The pattern for the ‘fear gauge’ of lower lows remains intact for the time being.
Treasury yields surged, with the yield on the 10-year Treasury note climbing +10.2 basis points to 2.888%. This feels like a temporary push higher in what may ultimately be a resumption of the downward move after peaking in June.
Commodities were mixed, with crude oil futures (+2.57%) rising to $94.5/barrel. Energy stocks also fared well on the day. Metals lost ground, with gold (-0.61%) slipping to $1,802/oz.
Economic Data and News
On the economic data front, earlier in the week we saw consumers’ inflation expectations have dropped sharply. In the latest survey by the Federal Reserve Bank of New York, expectations for U.S. inflation three years ahead fell to 3.2% in July from 3.6% in June. It was the second straight monthly drop.
The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose four-tenths of a point in July to 89.9, the first monthly increase since December. It’s a sign that U.S. small business confidence edged up last month as fuel prices eased and job openings became marginally easier to fill.
All eyes were on July’s CPI print on Wednesday, and it didn’t disappoint. The consumer price index rose 8.5% from a year ago, falling from June’s 9.1% rise and below expectations of 8.7%. Core CPI, which excludes the more volatile food and energy prices, rose 5.9% year-over-year, also below estimates of 6.1%. There was a common belief that Core CPI would continue to rise, so this was a big deal for the market.
This morning we learned producer price index data showed that wholesale prices fell -0.5% in June, much better than the 0.2% rise estimated by analysts. Core prices increased 0.2% from June versus a consensus of 0.4%, also beating estimates.
Finally, some good news on the inflation front, and let’s hope this downward shift becomes a real trend in the months ahead.
Initial jobless claims rose again last week to a high for the year of 262,000, a rise of 14k from the prior week. However, the figure came in below estimates of 264k. Still, the trajectory of initial claims is concerning, and points to the possibility that the economy is either in or near a recession after two quarters of negative real GDP growth.
In our recent Zacks Ultimate Strategy Session, I discussed the importance of identifying whether we are in a recession in the context of the bottoming process during this bear market. In an excerpt from the session, we can see below that bear markets without a recession (black line) tend to rally in a much more convincing way after the trough, as opposed to bear markets with a recession (blue dotted line), where we can see the bottoming process is much more drawn out.
Image Source: Ned Davis Research
Bear markets with associated economic recessions tend to last longer and are more severe in terms of drawdowns, so it can be helpful to know which case we are dealing with. Of course, the National Bureau of Economic Research (NBER) won’t make the recession declaration for some time.
Portfolio Summary
Our portfolio held up well today as we had 13 stocks in the green with 12 in the red.
PSX (+3.15%) and CVX (+2.44%) led the upside as oil and energy companies had a solid outing. We’re maintaining a close eye on our energy exposure, however, as the price of oil has now entered an intermediate downtrend.
Our financial holdings PRU (+1.32%) and GS (+1.08%) also showed relative strength.
NTR (+0.17%) reported quarterly results earlier in the week. Q2 earnings of $5.85/share slightly missed estimates of $5.90/share, but compared favorably to the $2.08/share from a year ago. The fertilizer company posted revenues of $14.51 billion, also missing estimates by 5.56%. The stock has reacted favorably since the announcement and has risen more than 25% since the June low.
We added shares of COST (-1.41%) yesterday. Costco operates membership warehouses globally, offering branded and private-label products in a range of merchandise categories. The company also operates various e-commerce websites.
Costco has been a market leader for many years, and we are taking advantage of this year's decline in price to add the position to our portfolio. A Zacks Rank #2 (Buy), Costco is part of the Zacks Retail - Discount Stores industry, which ranks in the top 39% out of approximately 250 industries.
While the company's dividend ($3.6, 0.67%) doesn't appear that appealing at first glance, they've consistently raised their dividend for the past decade and have often paid large special dividends in the past. The growth trend of dividends is often more important than the absolute value of the current dividend itself.
We have a few more major earnings reports due out next week including Target and Cisco, and will be sure to cover those in detail as well.
Conclusion
Stocks continue to hover near important technical levels. August has tended to be quite weak in midterm years, but the action so far is undoubtedly bullish, and the rally that began in mid-June may still have some legs.
We’ll continue to maintain a close eye on our positions as things can change quickly.
Hope you all enjoy your evening and we’ll talk again tomorrow.
Warm Regards,
Bryan
