AMERIPRISE FINANCIAL, INC.
Stocks closed last week higher for the second time in three weeks. The S&P 500 Index jumped +2.6%, while the NASDAQ Composite finished the week higher by +3.3%. Despite risk-off trading on Friday, the S&P 500 ended the week back above its 50-day moving average. Not since April has the Index been able to trade above its short-term trading trend. In addition, the Dow Jones Industrials Average finished up nearly +2.0%.
On the week, Growth outperformed Value. Consumer Discretionary (+6.8%) led the S&P 500 higher, supported by large gains in Tesla and Amazon. Technology (+3.6%) also popped higher last week, driven by strength across semiconductor stocks. Notably, Energy (+3.5%) was able to buck the trend lower in crude prices, as oil services stocks put in a solid week of performance. WTI oil finished last week at $94.62 per barrel, and Gold closed at $1722.70 per ounce.
One of the more significant macroeconomic factors helping to drive U.S. stock prices higher is the continued pullback in the U.S. dollar and falling U.S. Treasury yields. The greenback has declined roughly 2.0% from its mid-July high, helping to take some pressure off tightening financial conditions and ease fears of lower multinational profits due to currency headwinds. Similarly, the 10-year U.S. Treasury yield closed last week at 2.79%, well below its 3.48% peak in mid-July. And despite the recessionary warnings that an inverted 2Y/10Y Treasury spread continues to flash, investors have welcomed falling yields with higher stock prices this month.
That said, the 3M/10Y Treasury spread continues to narrow aggressively, which is a more ominous sign for the bulls hoping the U.S. economy can avoid a recession. Unfortunately, the spread between the 3-month Treasury yield and the 10-year Treasury yield has narrowed by nearly 190 basis points since early May. Given that the 10-year currently outyields the 3-month by just 41 basis points (which is the spread the Federal Reserve pays outsized attention to), recession warnings are likely to grow louder, particularly if it continues to head toward inversion.
But despite increasing recession warnings in the bond market, the S&P 500 is higher by +4.7% month-to-date, while the NASDAQ is up +7.3% month-to-date. The question on our minds? Can the stock market continue to look past the building probability of a shallow recession and focus instead on the eventual recovery? Notably, bear market rallies and bear market troughs look very similar in the heat of the moment. In our view, it's too soon to tell if investors are beginning to look through all the bad news (a positive sign for longer-term investors) or just taking advantage of a typical bear market rally that may eventually fade. This week could bring a critical test for the market, given the barrage of Q2 earnings reports, Wednesday's Federal Reserve policy decision, and Thursday's first look at Q2 GDP.
Lukewarm market reaction to housing data, overseas news
Other items of note last week centered on a batch of disappointing housing data, including June's existing home sales coming in at their slowest pace since June 2020 and July's National Association of Home Builders sentiment posting its second-largest drop on record. Also, weekly initial jobless claims hit their highest levels since November 2021. And helping round out U.S. data updates last week, the July flash Markit Purchasing Managers' Index (PMI) for manufacturing and services declined to mid-2020 levels.
Overseas, the European Central Bank (ECB) lifted its target rate by 50 basis points, the first rate increase since 2011. With the 50 basis point move, the ECB brings its target rate out of negative territory for the first time since 2014, when the central bank was fighting a sovereign debt crisis. The central bank also announced a new bond-buying tool called the Transmission Protection Instrument (TPI). The device is designed to help heavily indebted nations cope with higher borrowing costs due to the ECB's need to lift rates to fight inflation. However, a lack of detail on how TPI would be triggered resulted in a lukewarm response from the market last week.
And in Italy, Italian Prime Minister Mario Draghi resigned after losing support from the Five Star Movement and other supporting parties in his coalition government. Given the collapse in Italy's government, a general election is expected to be held in September or October, with Mr. Draghi remaining in his position as a caretaker until the general election.
Investors' eyes are on the Fed this week
Looking ahead, this week could play a critical role in helping shape whether stock prices can continue on the road to recovery after an abysmal first half of performance.
On Wednesday, the Federal Reserve is widely expected to lift its fed funds target rate by 75 basis points after investors backed off expectations for a 100 basis point move following the +9.1% year-over-year headline Consumer Price Index (CPI) print for June. The market will likely parse the policy statement this week for clues on how the committee interprets slowing growth trends and record-high inflation. Importantly, investors will pay particularly close attention to what Fed Chair Jerome Powell says in the press conference following the policy decision. We expect Mr. Powell to reinforce the Fed's commitment to returning price stability to the economy and willingness to lift rates further to bring down inflation pressures and cool demand. Bottom line: We believe the market is looking for clues on if the Fed believes the U.S. economy has slowed down enough to warrant a smaller rate hike in September. If investors believe a 50 basis point hike is likely at the next meeting, we believe stocks may look past this week's decision and continue to grind higher on the narrative that the Fed is through the most aggressive part of its hiking cycle.
On Thursday, the Bureau of Economic Analysis will release its preliminary estimate for second quarter U.S. GDP. The Atlanta Federal Reserve's GDPNow tracker forecasts economic growth contracted by 1.6% in the second quarter and after the economy also shrank by 1.6% in the first quarter. We believe few investors would be surprised if U.S. GDP posted its second consecutive quarter of negative growth, as stock prices likely reflect a shallow recession at this point. Though the National Bureau of Economic Research (NBER) is the official arbiter of calling a recession, two consecutive quarters of negative GDP growth would likely be enough for most to assume the U.S. economy is in a recession. But the rearview data is unimportant to directing stock traffic moving forward, other than to drive news headlines following its release. Bottom line: Growth in the economy has meaningfully slowed (most know this), and we believe stock prices have already absorbed much of the pain. We believe the critical items to watch are the path forward for inflation and Fed policy. Slowing inflation in Q3 and a less aggressive Fed could help return the economy to a growth trajectory in the second half. Easing supply chain pressures, a still resilient consumer, and a tight labor market are positive factors that could eventually allow stock prices to look past the Q2 print and focus on better days ahead. That said, we don't expect markets to cheer a weak or negative Q2 GDP print this week.
Q2 earnings results better than investors feared, so far
Lastly, 175 S&P 500 companies, including in big tech, report Q2 earnings results this week. As of Friday, the blended earnings per share (EPS) growth rate for S&P 500 companies stood at +4.8% year-over-year on sales growth of +10.9%. While that's the slowest pace of profit growth since Q4 2020, earnings reports and outlooks have been coming in better than feared. On the surface, that's been enough to add a tailwind to stock prices since the season began, given investors were bracing for worst-case scenarios. However, thus far, S&P 500 company guidance for Q3 profits has been overwhelmingly negative. Yet, themes of a still resilient consumer, easing supply chain pressures, and companies holding margins have helped counter more negative trends in results/outlooks.
As the books close for July, the bulls can point to the peak inflation narrative gaining some steam, peak Federal Reserve hawkishness, consumer resilience given recent earnings reports, profit estimates coming down, a pullback in the U.S. dollar, and falling commodity prices. On the other hand, the bears can counter with inflation pressures that are broadening across the economy, elevated recession odds, continued moderation in economic activity, slowing housing trends, and a lack of capitulation among investors. In either case, the path forward in our book is to maintain discipline, expect more volatility, and continue to use strategies that mitigate risk, so your portfolio is prepared for the eventual turn.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
Growth securities, at times, may not perform as well as value securities or the stock market in general and may be out of favor with investors.
Value securities may be unprofitable if the market fails to recognize their intrinsic worth or the portfolio manager misgauged that worth.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The S&P 500 Financials Index is an index containing companies included in the S&P
500 that are classified as members of the financials sector.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
The Purchasing Managers' Index™ (PMI™) is a composite index based on five of the individual indexes with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers' Delivery Times - 0.15, Stock of Items Purchased - 0.1, with the Delivery Times index inverted so that it moves in a comparable direction.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
On the week, Growth outperformed Value. Consumer Discretionary (+6.8%) led the S&P 500 higher, supported by large gains in Tesla and Amazon. Technology (+3.6%) also popped higher last week, driven by strength across semiconductor stocks. Notably, Energy (+3.5%) was able to buck the trend lower in crude prices, as oil services stocks put in a solid week of performance. WTI oil finished last week at $94.62 per barrel, and Gold closed at $1722.70 per ounce.
One of the more significant macroeconomic factors helping to drive U.S. stock prices higher is the continued pullback in the U.S. dollar and falling U.S. Treasury yields. The greenback has declined roughly 2.0% from its mid-July high, helping to take some pressure off tightening financial conditions and ease fears of lower multinational profits due to currency headwinds. Similarly, the 10-year U.S. Treasury yield closed last week at 2.79%, well below its 3.48% peak in mid-July. And despite the recessionary warnings that an inverted 2Y/10Y Treasury spread continues to flash, investors have welcomed falling yields with higher stock prices this month.
That said, the 3M/10Y Treasury spread continues to narrow aggressively, which is a more ominous sign for the bulls hoping the U.S. economy can avoid a recession. Unfortunately, the spread between the 3-month Treasury yield and the 10-year Treasury yield has narrowed by nearly 190 basis points since early May. Given that the 10-year currently outyields the 3-month by just 41 basis points (which is the spread the Federal Reserve pays outsized attention to), recession warnings are likely to grow louder, particularly if it continues to head toward inversion.
But despite increasing recession warnings in the bond market, the S&P 500 is higher by +4.7% month-to-date, while the NASDAQ is up +7.3% month-to-date. The question on our minds? Can the stock market continue to look past the building probability of a shallow recession and focus instead on the eventual recovery? Notably, bear market rallies and bear market troughs look very similar in the heat of the moment. In our view, it's too soon to tell if investors are beginning to look through all the bad news (a positive sign for longer-term investors) or just taking advantage of a typical bear market rally that may eventually fade. This week could bring a critical test for the market, given the barrage of Q2 earnings reports, Wednesday's Federal Reserve policy decision, and Thursday's first look at Q2 GDP.
Lukewarm market reaction to housing data, overseas news
Other items of note last week centered on a batch of disappointing housing data, including June's existing home sales coming in at their slowest pace since June 2020 and July's National Association of Home Builders sentiment posting its second-largest drop on record. Also, weekly initial jobless claims hit their highest levels since November 2021. And helping round out U.S. data updates last week, the July flash Markit Purchasing Managers' Index (PMI) for manufacturing and services declined to mid-2020 levels.
Overseas, the European Central Bank (ECB) lifted its target rate by 50 basis points, the first rate increase since 2011. With the 50 basis point move, the ECB brings its target rate out of negative territory for the first time since 2014, when the central bank was fighting a sovereign debt crisis. The central bank also announced a new bond-buying tool called the Transmission Protection Instrument (TPI). The device is designed to help heavily indebted nations cope with higher borrowing costs due to the ECB's need to lift rates to fight inflation. However, a lack of detail on how TPI would be triggered resulted in a lukewarm response from the market last week.
And in Italy, Italian Prime Minister Mario Draghi resigned after losing support from the Five Star Movement and other supporting parties in his coalition government. Given the collapse in Italy's government, a general election is expected to be held in September or October, with Mr. Draghi remaining in his position as a caretaker until the general election.
Investors' eyes are on the Fed this week
Looking ahead, this week could play a critical role in helping shape whether stock prices can continue on the road to recovery after an abysmal first half of performance.
On Wednesday, the Federal Reserve is widely expected to lift its fed funds target rate by 75 basis points after investors backed off expectations for a 100 basis point move following the +9.1% year-over-year headline Consumer Price Index (CPI) print for June. The market will likely parse the policy statement this week for clues on how the committee interprets slowing growth trends and record-high inflation. Importantly, investors will pay particularly close attention to what Fed Chair Jerome Powell says in the press conference following the policy decision. We expect Mr. Powell to reinforce the Fed's commitment to returning price stability to the economy and willingness to lift rates further to bring down inflation pressures and cool demand. Bottom line: We believe the market is looking for clues on if the Fed believes the U.S. economy has slowed down enough to warrant a smaller rate hike in September. If investors believe a 50 basis point hike is likely at the next meeting, we believe stocks may look past this week's decision and continue to grind higher on the narrative that the Fed is through the most aggressive part of its hiking cycle.
On Thursday, the Bureau of Economic Analysis will release its preliminary estimate for second quarter U.S. GDP. The Atlanta Federal Reserve's GDPNow tracker forecasts economic growth contracted by 1.6% in the second quarter and after the economy also shrank by 1.6% in the first quarter. We believe few investors would be surprised if U.S. GDP posted its second consecutive quarter of negative growth, as stock prices likely reflect a shallow recession at this point. Though the National Bureau of Economic Research (NBER) is the official arbiter of calling a recession, two consecutive quarters of negative GDP growth would likely be enough for most to assume the U.S. economy is in a recession. But the rearview data is unimportant to directing stock traffic moving forward, other than to drive news headlines following its release. Bottom line: Growth in the economy has meaningfully slowed (most know this), and we believe stock prices have already absorbed much of the pain. We believe the critical items to watch are the path forward for inflation and Fed policy. Slowing inflation in Q3 and a less aggressive Fed could help return the economy to a growth trajectory in the second half. Easing supply chain pressures, a still resilient consumer, and a tight labor market are positive factors that could eventually allow stock prices to look past the Q2 print and focus on better days ahead. That said, we don't expect markets to cheer a weak or negative Q2 GDP print this week.
Q2 earnings results better than investors feared, so far
Lastly, 175 S&P 500 companies, including in big tech, report Q2 earnings results this week. As of Friday, the blended earnings per share (EPS) growth rate for S&P 500 companies stood at +4.8% year-over-year on sales growth of +10.9%. While that's the slowest pace of profit growth since Q4 2020, earnings reports and outlooks have been coming in better than feared. On the surface, that's been enough to add a tailwind to stock prices since the season began, given investors were bracing for worst-case scenarios. However, thus far, S&P 500 company guidance for Q3 profits has been overwhelmingly negative. Yet, themes of a still resilient consumer, easing supply chain pressures, and companies holding margins have helped counter more negative trends in results/outlooks.
As the books close for July, the bulls can point to the peak inflation narrative gaining some steam, peak Federal Reserve hawkishness, consumer resilience given recent earnings reports, profit estimates coming down, a pullback in the U.S. dollar, and falling commodity prices. On the other hand, the bears can counter with inflation pressures that are broadening across the economy, elevated recession odds, continued moderation in economic activity, slowing housing trends, and a lack of capitulation among investors. In either case, the path forward in our book is to maintain discipline, expect more volatility, and continue to use strategies that mitigate risk, so your portfolio is prepared for the eventual turn.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
Growth securities, at times, may not perform as well as value securities or the stock market in general and may be out of favor with investors.
Value securities may be unprofitable if the market fails to recognize their intrinsic worth or the portfolio manager misgauged that worth.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The S&P 500 Financials Index is an index containing companies included in the S&P
500 that are classified as members of the financials sector.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
The Purchasing Managers' Index™ (PMI™) is a composite index based on five of the individual indexes with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers' Delivery Times - 0.15, Stock of Items Purchased - 0.1, with the Delivery Times index inverted so that it moves in a comparable direction.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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Ameriprise Financial Inc. published this content on 25 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 July 2022 19:25:06 UTC.
