by Bryan Perry
August 6, 2024
Volatility spiked last week following a string of disappointing second-quarter results, the assassination of a Hamas leader in Tehran, dismal manufacturing data, and a jobs report that showed growth in the U.S. labor market slowing more than expected. The CBOE Volatility Index, also known also as “the fear index,” leaped to 29.70 during Friday’s session before backing off to close at 23.39. Such a parabolic move typically marks a selling climax, but it is by no means a guarantee of the end of selling.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Despite some not-so-magnificent Q2 results from the Mag-7 leaders, FactSet reports that 78% of S&P 500 companies have reported positive EPS surprises (with 75% of S&P 500 companies reporting actual results), and 59% of S&P 500 companies have reported a positive revenue surprise. For Q2 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 11.5%. If 11.5% is the ending growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (at 31.4%). As of the end of Q2 on June 30, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q2 was only 8.9%. Nine of 11 sectors are reporting higher Q2 earnings (compared to Q1 June 30) due to upward revisions to EPS estimates and positive EPS earnings guidance.
Looking forward to Q3 2024, 39 S&P 500 companies have issued negative EPS guidance while only 35 S&P companies have issued positive EPS guidance. The key takeaway from this set of quarterly stats is that the negative reaction to big-cap technology, with the bar set so high, and the big miss on the jobs report, are over-shadowing what is otherwise a pretty impressive performance by the broader S&P 500.
The S&P Equal Weight ETF (RSP) shows a much more constrictive pattern than the SPDR S&P 500 ETF (SPY), where eight of the top 10 holdings are mega-technology and account for roughly 36% of total assets:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Commodity prices were a big part of the rise in inflation, but they have made a material move lower in the past two months. The CRB Index, which tracks the overall movement of commodities, is in a steep decline. It consists of 19 different commodities, grouped into energy (39%), base/industrial metals (13%), agricultural products (41%) and precious metals (7%), boosted only by recent record highs in gold.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Rates on 10-year government bonds have declined sharply in the past month, sending a clear signal to global fixed income markets that when the U.S., which accounts for 26% of the global economy, sees a cooling of its labor markets, it is incumbent upon the Federal Reserve – the world’s top central bank – to respond swiftly. Markets are roiled because of a growing concern the Fed is once again behind the curve.
Here is the downward trend of benchmark 10-year-yields in most developed economies, worldwide:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed failed to manage inflation in a timely manner, so the U.S. economy and consumers are suffering from their delayed reaction, and the decision to hold the Fed funds rate at 5.25%-5.50% last week – by a unanimous decision – was clearly wrong in the eyes of the fixed income market, as well as the equity markets. The latest read from the bond futures market is clearly a call for a 50-basis point cut in September, a 50-basis point cut in November and a 25-basis point cut in December. This past weekend, JPMorgan Chase & Co. also predicted half-point rate cuts in both September and November.
The markets are reacting not just to one soft jobs report, manufacturing in the U.S. has been on a steady decline for almost two years. The July ISM Manufacturing Index checked in at 46.8 versus 48.5 in June. The dividing line between expansion and contraction is 50, so the July reading suggests that there was a faster pace of contraction in the manufacturing sector last month. This was the fourth straight month (and 20th out of the last 21 months) that economic activity in the manufacturing sector contracted. This conveys clear weakness in the manufacturing sector that is a byproduct of subdued demand.
Fed Chair Jerome Powell noted in his post FOMC presser that incoming data would set the stage for upcoming rate cuts. Between now and the next Fed gathering on September 18, markets will digest a litany of data that may or may not corroborate the weaker employment data. Based on the falling prices of energy and commodities, the risk of sticking a soft landing is questionable if the Fed waits too long.
A JPMorgan economist said that there is even an argument to be made for an unscheduled cut, saying, “With the benefit of hindsight, it’s easy to say the Fed should have cut this week.” Michael Feroli, Chief U.S. economist at JPMorgan, in a note last Friday, continued: “It’s also easy to say they will cut soon. How soon and how much are harder questions.” Even if the weakness in the job market levels off later, the Fed would still appear to be “offsides,” he said, by 100 basis points or more, adding, “From a risk management perspective, we think there’s a strong case to act before September 18th” Feroli concluded.
There is clearly disinflation at work and the Fed should respond sooner rather than later. It would not be the first time the Fed has cut rates between meetings, and the market would find it prudent if they did call for an immediate response to the newfound data that points to some potential contraction in the labor market. (The Fed’s dual mandate is to control inflation and maintain stable and healthy labor markets).
The fight on inflation is being won, and the pace of hiring is slowing, so why wait? The bond market is calling loudly for action, not in late September, but now. I’m sure Fed Chair Jerome Powell and his 11 other voting members that make up the FOMC committee are taking serious notice of the bond market’s reaction, and hopefully they are on a Zoom call with the intention of getting in front of a potential economic slowdown, so that the path to a soft landing remains intact.
There is no loss of pride for doing the right thing after nothing was done at last week’s Fed gathering. The markets would cheer loudly, and the Fed would earn a gold medal.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Jobs Data is Weaker Than Expected
Income Mail by Bryan Perry
The Market Fears the Fed is Behind the Curve Again
Growth Mail by Gary Alexander
The Current Medal Count Between the Big 3 Economies
Global Mail by Ivan Martchev
The Bond Market is Already Cutting Rates for the Fed
Sector Spotlight by Jason Bodner
What Kind of Volatility to Expect, Especially in Election Years
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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