The first week of August ended green for the stock market, carrying forward with the positive mindset that shown throughout July. The week started slowly. There were assumptions that the market was facing selling pressure after the big move in July, however that assumption did not hold through in the end of the week. The selling slump was overcome on Wednesday and paved the way for a winning week.
The week started poorly coinciding with the weak ISM Manufacturing Index report for July, a drop in oil prices on demand concerns, and Pelosi’s visit to Taiwan on Tuesday. China’s actual response to the visit paled in comparison to what they had expressed beforehand. On Friday, China announced that they would be sanctioning Pelosi and her family and cut back on cooperation with the US on certain matters like climate change initiatives.
The lack of a more severe consequence and OPEC announcement of more output were the catalysts for the rally on Wednesday and beyond. WTI crude prices fell below $90 this week and settled just under $89 on Friday. This move undercut the energy sector which was the worst performing sector this week with a 6.8% decline. The best sectors were information technology, consumer discretionary, and communication services.
The rally of mega-cap stocks brought widespread support to the indexes this week, evident in the performance of the Vanguard Mega-Cap Growth ETF ($MGK). It gained 1.8% this week versus a 0.4% gain for the S&P. This shows the continued outperformance of the growth stocks and indexes.
The week also had some flair with some major short squeezes in several stocks and AMTD Digital ($HKD) went from $13.00 per share on July 15th to $2,555.30 at its highest on Tuesday. There was no news behind this move.
Earnings continued this week, but it seemed like less eyes were homed in on them. They generally had better-than-feared results. Unlike the prior weeks, economic news seemed to be more important than earnings as seen with the July employment numbers. Non-farm payrolls increased by 528,000, hour earnings were up 5.2% year-over-year, and unemployment fell to 3.5%. The takeaway here was that the fed can turn friendly with their policy decisions sooner rather than later.
The Treasury market embodied this with 2-year yield increasing 33 basis points this week and the 10-year moving 20 basis points. Most of this movement came after the release of the jobs data. Initially, the market was worried by the report and the move in rates with the logic being that if jobs are so strong the Fed can continue to be aggressive on policies if needed. However, that school of thought was traded for the alternative friendlier Fed that was mentioned earlier.
There are two possible outcomes regarding the Fed. The continued strength of the job market shows that the economy can handle the Fed’s rate hikes without putting us into “hard landing” territory. The other take is that employment is a lagging indicator and given the lag effect of the rate increases, there will be much weaker numbers in the coming months that will motivate a shift in policy sooner rather than later.
I, personally, think the latter situation makes more since. However, I have been saying that in these recaps for weeks now and keep getting proved wrong! It’s hard to say what the ultimate driver of market sentiment has been for these past few weeks. Lack of factors is irrelevant though, because the market is standing its ground with its third straight winning week this week.
Next week we have CPI measures, a new consumer sentiment reading, and retail data, most of which are forecasted to improve. Overall, next week has a small calendar, but if these three items report well we could be heading for another green week!
My bearishness on the last week was incorrect. I’m also beginning to change my mindset with the market. Over the long term, I am still bearish as I believe the Feds rate hikes take a good amount of time before their effects are felt, let alone reported in data. However, in the short term, data and sentiment are trending in the right direction and it looks like we are set up for a good week next week.
Maybe I’ve just been spoiled by buying so many cheap dividend stocks in this market that I want things to stay bearish! Regardless of the way things move, we will buy structurally sound companies that pay safe dividends and have a promising future. We did this last week with some buys in $INTC and $CMCSA to name a few. Read the portfolio update here.