Drinking from a Fire Hose
By: Tim Hoyle, CFA, Chief Investment Officer
Market participants and bystanders alike are drinking from the proverbial firehose this week. Unfortunately, it won’t help with this nationwide heatwave. More than 170 S&P 500 constituents will report earnings this week, including the index’s four largest companies: Apple, Microsoft, Alphabet, and Amazon. On the economic front, second quarter GDP, Jobless Claims, Personal Consumption Expenditures (PCE), and the Employment Cost Index (ECI) are all set to be released later this week. In addition to the slew of corporate and economic data, the Federal Open Market Committee (FOMC) is also widely expected to increase the Fed Funds rate by another 75 basis points on Wednesday. Here are a few things we will be looking for in the firehose blast of information:
Earnings: So far this month, “cacophony” best describes management’s forward-looking earnings commentary. For example, between the nation’s two largest banks, J.P. Morgan’s Jamie Dimon came across significantly more pessimistic than Bank of America’s Brian Moynihan. Also in contrast, Verizon was negative on the consumer outlook relative to American Express’ more optimistic take. This is to be expected in a slowing economy where consumers are being forced to make consumption choices in the face of rising prices.
We anticipate this week’s announcements will contain the same incongruencies. However, this week will also provide commentaries from a more diverse set of companies. Technology will dominate the headlines, but we will also hear from many more Industrial and Health Care companies. We are most interested in hearing if corporate expectations are declining.
Economic Data: There is a high probability that the data shows the economy has shrunk, on a real basis, for the second quarter in a row. We will leave it to others to debate the definition of recession and instead focus on the more important data: jobless claims and prices. Weekly jobless claims have been slowly rising since March, and while the trend is by no means elevated, the direction provides a real-time measure of economic health. The PCE data will also be important for forward expectations as investors are looking for any evidence that inflation has peaked.
FOMC: There is a growing consensus opinion that following an anticipated 75-basis point hike this week, the Fed will begin to pivot towards a slower rate of future hikes. Fed Funds futures are even indicating the Fed will actually cut rates mid-way through 2023. Just today, there is article posted to WSJ.com today titled, “Investors Bet Fed Will Need to Cut Interest Rates Next Year to Bolster the Economy[1].” We believe the market could be overly optimistic in believing a Fed pivot is upon us. In order to contain inflation expectations, we believe Chairman Powell could use Wednesday’s press conference to push back on this notion. Recently, several voting members have articulated the need to take the Fed Funds Rate above the core rate of inflation. We believe we should take them at their word.
Despite our current focus on this week’s flood of information, keep in mind that our primary focus should always remain on the long-term prospects, both strengths and weaknesses, of the companies we are invested in. If you have any questions about your individual portfolio and goals, both short- and long-term, please do not hesitate to reach out to us during this summer and economic heatwave.
[1] Investors Bet Fed Will Need to Cut Interest Rates Next Year to Bolster the Economy – WSJ
