What happened in the markets - 7-11 Aug 2023

Introduction

For the second consecutive week, the S&P 500 and Nasdaq Composite indexes reported declines, with the technology sector facing persistent weakness and inflation indicators surpassing predictions.

During the initial phase of the market rally, it was primarily fueled by excitement surrounding artificial intelligence (AI), and the surge was largely spearheaded by large-cap technology companies. However, in more recent times, the rally has become more comprehensive in nature. Leadership has shifted to cyclical sectors, and there have been rebounds observed in small-cap stocks and international equities. This transition unfolded amid the backdrop of various concerns that the market navigated, including worries about inflation, the actions of the Federal Reserve, and the broader economic outlook.

Key Takeaway on this week

Inflation is consistently moving in a favourable direction.
The Federal Reserve appears inclined to maintain its current stance for the time being.
The economy is demonstrating more resilience than initially anticipated.

Inflation expectation

The economic calendar for the week was relatively light but included some significant inflation data. The stock market experienced an initial surge on Thursday due to the Labor Department's consumer price index (CPI) data, which indicated a 0.2% rise in July, bringing the year-over-year increase to 3.2%, just below expectations. This was partly attributed to a significant decrease in airline fares, which helped offset ongoing pressure from shelter costs.

However, the market's enthusiasm over the CPI data appeared to fade as the day progressed, resulting in mixed stock performance on Friday. This was in response to news that producer prices had risen 0.3% in the month, slightly above expectations. On a year-over-year basis, producer prices increased by 0.8%, which remains well below the Federal Reserve's target for consumer inflation of 2%. Notably, July marked the first annual rise in the rate of producer price inflation in over a year.

Throughout the week, Federal Reserve officials presented somewhat mixed views on the inflation outlook. Fed Governor Michelle Bowman indicated the potential need for further rate hikes, while New York Fed President John Williams suggested that the rate hike cycle was drawing to a close, potentially leading to rate cuts in 2024. Other officials, like Philadelphia Fed President Patrick Harker and Richmond Fed President Thomas Barkin, expressed comfort with keeping rates unchanged for the time being and advocated for a pause in the rate hike cycle.

The Fed's GDP-Now tool indicates 4.1% real GDP growth for the U.S. in the third quarter 2023.

Mixed results

The major stock market indices concluded the week with a mixed performance, as investors balanced inflation data with concerns regarding the recent uptick in long-term interest rates. Value stocks outperformed growth stocks notably, and the Dow Jones Industrial Average, with its focused composition, achieved a modest gain. Traders from T. Rowe Price observed relatively light trading volumes, influenced by the ongoing summer vacation period and a lull as the quarterly earnings reporting season neared its conclusion.

Midweek, the health care sector received a boost from additional evidence supporting the effectiveness of diabetes drugs in treating obesity and related conditions. In contrast, information technology stocks underperformed due to concerns that increasing interest rates might diminish the value of forthcoming profits. The industrials sector also faced weakness, largely due to escalating worries about a potential strike by the United Auto Workers union.

Financials stocks experienced a brief sell-off on Tuesday morning after Moody’s Investors Service lowered credit ratings for ten small- and mid-cap banks and placed six other entities on a downgrade watch. Moody's cited factors such as funding costs and the banks' exposure to the troubled commercial real estate sector. However, stocks within the financial sector rebounded somewhat as the week advanced.

Pullbacks since the start of August 2023.
*Source: FactSet, 8/11/2023. "Magnificent 7" represented by AAPL, MSFT, AMZN, NVDA, GOOGL, META, & TSLA.*

Bonds are experiencing an active new issue market.

The release of the producer price report led to an increase in the yield on the 10-year Treasury note by the end of the week. Notably, when bond prices rise, yields tend to fall, and vice versa. Our traders have noted that August reinvestment cash has provided favourable support for the municipal bond market. The primary calendar for municipal bonds remained active, and new deals received strong demand, often being oversubscribed. Similarly, the investment-grade corporate bond market experienced high issuance volume throughout the week. In the high yield bond market, there was active trading in new issues, although volumes were relatively light, which can be attributed to the seasonal nature of the market.

*Source: Factset 08/11/2023. Bonds represented by the iShares Core U.S. Aggregate Bond ETF.*

Stocks on the move

Here are the notable stock price movements driven by quarterly earnings, analyst ratings, or other news:

Coinbase (COIN) shares declined by nearly 2.5% after Mizuho reaffirmed its "underperform" rating on the stock. The report highlighted that many cryptocurrency traders are shifting to other trading platforms.
DigitalOcean Holdings (DOCN) shares gained 3.3% following an upgrade from Morgan Stanley, which raised its rating to "equal weight" from "underweight." The upgrade reflected the belief that the company's previously lowered outlook for 2023 revenue and other financial metrics are now in the past.
Krispy Kreme (DNUT) shares rose by 4.2% after JPMorgan reiterated its "overweight" rating on the donut chain. The rating reaffirmation was based on the perception that the company's shares are currently undervalued.
Alphabet (GOOGL) has a Relative Strength Rating of 90. That means it has outperformed 90% of stocks tracked over the past 12 months in terms of price performance. Recent performance is strong, with Google stock rising more than 45% so far in 2023. This far outstrips the S&P 500's gain of nearly 17%.
Marvell Technology (MRVL)’s overall performance is strong, but not ideal, with its IBD Composite Rating coming in at 83 out of 99. It is in the top 6% of stocks in terms of price performance over the past 12 months. Earnings are the current weak spot, with EPS seen falling 59% in fiscal 2024. But earnings are then seen rebounding by a mighty 92% in 2025. For its fiscal 2023 that ended in January, Marvell sales rose 33% to $5.92 billion. In fiscal 2024, sales are expected to fall 6%, then rebound to 17% growth in fiscal 2025.
Visa (V)’s earnings growth is sturdy, if not ideal, with EPS rising by an average of 15.4% over the past three quarters. Gains are seen trending steadily higher. EPS is expected to climb 15% in 2023 before rising an additional 14% in 2024. In the most recent quarter Visa earnings rose 9% to $2.16 per share on 12% revenue growth to $8.1 billion, topping analyst views. A resilient U.S. consumer and strong travel trends worldwide are fueling transaction growth.

Conclusion

Despite a largely positive earnings season, major stock market indices have faced pressure this month. Around 79% of reporting companies have surpassed Wall Street's average earnings per share estimates this quarter, while 58% have beaten revenue expectations. Although the earnings-per-share beat rate is consistent with recent trends, the revenue percentage is lower than usual, marking the lowest figure for any quarter in six years. This could be attributed to subdued inflation preventing companies from significantly raising prices.

According to some analysts, the technology sector currently displays the weakest earnings profile among major growth-oriented sectors. Additionally, weak guidance from prominent large companies has contributed to this trend, and even when companies surpass earnings and sales estimates, stock prices have not seen significant gains. As a result, attention has shifted toward the outlook for earnings.

The upcoming week will see a notable slowdown in earnings reporting, with around 430 companies expected to disclose their quarterly results. However, the presence of major retailers in the calendar, such as Home Depot (HD) on Tuesday, Target (TGT) on Wednesday, and Walmart Inc. (WMT) on Thursday, is likely to capture investor interest. The tech sector will also be represented, with Cisco Systems (CSCO) and Applied Materials (AMAT) expected to report on Wednesday and Thursday, respectively.