It was yet another remarkable week in the markets. After enduring the worst correction of the year just a few weeks ago, last week delivered the best performance of the year. At the start of the month, fears of an imminent recession loomed large, but the leading market narrative has now shifted to the possibility of a "soft landing," with no recession and falling inflationary pressures. Implied volatility (as measured by the VIX index), which spiked significantly a few weeks ago indicating heightened fear and uncertainty, plummeted last week in one of the fastest, deepest drops on record for the VIX. So, is the coast clear?
Several factors contributed to the market's strength last week. Inflation data came in as expected, and retail sales exceeded consensus, suggesting more stable prices and a resilient consumer. Digging into the details, Retail Sales positively surprised, blowing away expectations, and this figure did not even include numbers from Amazon Prime Day, which boosted Retail Sales last July. As for inflation, the Consumer Price Index (CPI) rose 0.2% in July, matching consensus expectations, with the CPI up 2.9% from a year ago. This marks the first time the headline CPI has been below 3% since March 2021. However, it’s worth noting that a subset of prices, closely watched by the Fed as a gauge of inflation in the service sector—known as the “Supercore,” which excludes food, energy, other goods, and housing rents—also rose 0.2% in July and remains up 4.5% over the past year.
Another interesting development is the GDPNow measure from the Federal Reserve Bank of Atlanta, which is now projecting Q3 GDP at 2.0%, a notable drop of nearly 1% from the previous week. Curiously, when recession fears were peaking, this number was rising. Now that the market thinks the coast is clear, growth expectations, based on actual economic releases so far, have dipped.
Looking ahead, this week will see a lot of focus on what the Fed is saying, including Fed Chair Jerome Powell’s highly anticipated speech from Jackson Hole on Friday. The Democratic National Convention also kicks off this week. While the economic calendar is light, initial jobless claims each Thursday morning have taken on added significance due to concerns over the labor market. The second quarter earnings season is also winding down, with less than 10% of companies left to report. Wal-Mart’s strong results last week contributed to the market’s positive momentum. For the quarter, the year-over-year earnings growth rate for the S&P 500 is 10.9%, marking the best quarter for earnings growth since Q4 2021. However, it is important to note that the market’s new bellwether stock, Nvidia, is set to report on August 28th.
So here we are, halfway through the quarter. Despite notable market volatility, the overall market is essentially flat in terms of price. This is typical, given the seasonal pattern of the stock market and the election cycle. For some investors, the volatility has provided a silver lining—taxable investors, for instance, have had the opportunity to harvest tax credits by realizing losses on certain positions. With many investors and traders on holiday for the remaining weeks of August, more volatility would not be surprising.
In summary:
Stay invested. Stay diversified. Stay disciplined.
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