The hawks and doves of the Federal Reserve have been battling it out in the past few Federal Open Market Committee (FOMC) meetings. Last month, the hawks came out on top when the Fed decided to raise key interest rates by 25 basis points. This brought the baseline rate to 5.25% – 5.5% – the highest it’s been since 2007.
So, all eyes were on yesterday’s FOMC minutes for the July meeting in hopes that the Fed would turn dovish and give signs that the central bank was done hiking key rates.
Well, based on the latest minutes, it’s clear that the hawks are still circling.
The minutes stated:
With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.
There is still a high degree of uncertainty within the Fed regarding the effects of the prior rate hikes. The FOMC intends to continue its “data-dependent approach to policy and its firm commitment to bring inflation down to its 2% objective.”
This was not what Wall Street wanted to hear.
As a result, all three major indexes closed lower yesterday, with the S&P 500 slipping 0.76%, and the NASDAQ and Dow closing down 1.15% and 0.52%, respectively. Bond yields, on the other hand, continue to rise. The 10-year Treasury yield closed at 4.25% yesterday, the highest close since 2008.
Personally, I’m not surprised by the volatility. The fact is, seasonally we are in one of the worst times of year for the market. And right now, there are a lot of outside factors – aside from the Fed – that are affecting the price of stocks.
In today’s Market 360, I’m going to review the five factors that are affecting the market and then share where you should be focusing your energy…
5 Factors Affecting the Market
1. China’s Economic Woes
China is currently dealing with a plunge in exports and imports. In July, China’s exports declined 14.5% and imports dropped 12.4%. That marked the worst decline in exports since the COVID-19 crisis in February 2020. Complicating matters further, China’s official purchasing manager index (PMI) has declined for four-straight months – and it’s now at its lowest level in a year.
All of this coupled with a prolonged housing crisis from overbuilding has created a deflationary environment in China. China’s consumer prices dipped 0.3% in July, and producer prices slipped a much more dramatic 4.4% last month. Remember, deflation is dangerous because it can cause consumers to postpone their purchases. Also, there’s the risk that Chinese deflation could be exported to the U.S.
2. Inflation Cools
Fortunately, deflation has yet to rear its ugly head in the U.S., but inflation on the consumer and wholesale levels still continues to cool.
As I shared last week, The Consumer Price Index (CPI) only rose 0.2% in July and is up 3.2% year-over-year, in line with economists’ expectations. Core CPI, which excludes food and energy, also increased 0.2% in July and was up 4.7% in the past 12 months. That marked the smallest increase in core CPI since October 2021.
Overall, the core CPI has risen an at annualized rate of 3.1% in the past three months, which is the slowest pace since March 2021. So, consumer inflation is still moderating and will move significantly lower as soon as Owners’ Equivalent Rent and shelter costs cool off in the upcoming months.
Now, the Producer Price Index (PPI) report was a little shocking. It showed that PPI rose 0.3% in July and was up 0.8% in the past 12 months. The main culprit for last month’s rise was higher wholesale service costs, which were up 0.5%. Wholesale goods prices, though, only increased 0.1%. Excluding food, energy and trade, core PPI rose 0.3% in July and was up 2.4% in the past 12 months.
I was mostly disappointed in the July PPI report, as I actually anticipated negative growth. But goods prices remain suppressed, so that’s still a positive sign.
3. Closely Watched Treasury Auctions
The other big story last week was the latest Treasury auctions. Both the 10-year and 20-year Treasury auctions went well last week, as they showed strong demand for Treasuries. In turn, Treasury yields meandered lower, with the 10-year Treasury yield dipping back to about 4.0% on Wednesday.
Unfortunately, though, the 30-year Treasury auction hit a snag on Thursday, primarily due to inflation fears in the wake of the higher-than-expected PPI report. So, Treasury yields resumed their trek higher through the end of last week and into this week. As of today, the 10-year Treasury yield is back near 4.3%.
4. Energy Prices Meander Higher
Thanks to strong seasonal demand here in the U.S. and tight supplies, crude oil prices rose to their highest level since January. Last week, Brent crude oil prices rose to above $86 per barrel, while WTI crude climbed above $83 per barrel. Part of the recent rise in oil prices was also due to a Ukrainian sea drone blowing up a Russian tanker in the Black Sea.
Overall, though, energy prices have meandered higher over the past several weeks. In fact, given the recent strength in energy prices, Saudi Arabia threatened even deeper crude oil production cuts.
The recent strength in energy has been a positive for energy companies, with many of crude oil, natural gas and tanker stocks climbing higher.
5. Better-than-Expected 2Q Results
Second-quarter earnings results have also continued to come in better than expected. With the earnings announcement season winding down – more than 80% of S&P 500 companies have reported – FactSet reports that 79% have exceeded analysts’ earnings estimates. The average earnings surprise is 7.2%.
Despite the strong quarterly results, though, many stocks have still been hit in the wake of their earnings announcements. We saw this firsthand with Growth Investor Buy Lists stock, Super Micro Computer, Inc. (SMCI), last week. In the case of SMCI, it was merely profit-taking, as the stock has been on an incredible tear this year. But for other stocks, it came down to guidance. If the company didn’t provide a strong outlook, the stock was shot.
On the other hand, stocks with positive earnings surprises and strong guidance were rewarded handsomely. We saw this play out with another Growth Investor Buy Lists stock: Novo Nordisk A/S (NVO).
NVO boosted its outlook for fiscal year 2023 for the second time this year, as demand for Wegovy, its weight loss and diabetes drug, remains robust. During the first six months of the year, sales rose 29% year-over-year to DKK 107,667 million, and earnings increased 43% year-over-year to DKK 39,242 million, or DKK 17.41 per share.
Looking forward, Novo Nordisk now expects full-year 2023 earnings growth between 31% and 37%, up from previous forecasts for 24% to 30% annual earnings growth.
NVO stock is up 2.5% since it reported last week.
Sticking With What Works
We are in the seasonally bumpy month of August, when liquidity dries up and leaves the stock market susceptible to wild swings. So, the recent volatility will likely persist in the near term.
My favorite economist, Ed Yardeni, recently said that we have two choices in this environment: We can either “don’t worry, be happy,” or we can “worry but be happy anyway.” I’m in the latter camp.
The fact is that all good stock markets climb a wall of worry. But inflation is cooling, and central bank fears will continue to diminish in the upcoming months.
So, as investors, we should celebrate that interest rates will likely stabilize, especially as deflationary pressures from China spread to the U.S. Plus, the earnings environment has improved and will continue to improve this year.
While we’ll probably see more wild swings, I encourage you to remain patient. Our best defense in a market like this is a good offense. As investors, we need to remain focused on fundamentally superior stocks that continue to grow revenues and earnings, like the ones on my Growth Investor Buy Lists.
That is how we’ll come out on top.
You can join me at Growth Investor – and gain access to my exclusive Buy Lists – by clicking here.
Sincerely,
Louis Navellier
