Another Positive Week for Stocks: Week 2 of an Epic 2-Week Stretch

Jeff Buchbinder (00:00):

 

Hello everyone, and welcome to the latest LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Quincy Krosby. We're going to try to put on a good show for you here today, but it's going to be tough because Quincy, you haven't had your first cup of coffee yet, and I haven't had breakfast. It is Monday, July 31, 2023 as we're recording this, late morning, we're still going to try to bring the energy though. Do you think we can do it, Quincy?

 

Quincy Krosby (00:27):

 

We've got to.

 

Jeff Buchbinder (00:29):

 

We got no choice. This is no choice. Pretty much live, pretty much live. We, we got no choice. Yeah. So we're going to have a good show for you today. I know you'll agree. Here's our agenda. We've got a lot to talk about. It's much more fun to do this when the market's keep going higher. So first we'll recap the market activity from last week. It was just a massive week. I mean, I'm still, I mean, one of the reasons I haven't had time for breakfast yet, and it's almost lunchtime here in Boston, is because digesting last week was exhausting, right? Three central bank meetings, key economic data, GDP, PCE, 166, I think S&P 500 companies reported earnings, just dizzying amount of information and stocks went up. So, all in all clearly the market liked it.

 

Jeff Buchbinder (01:18):

 

We'll talk about the Weekly Market Commentary for this week, which you can get on lpl.com. It's a second half economic outlook from Dr. Jeffrey Roach, our Chief Economist. Next, we'll review earning season. We're a little past the half point, and it's been good. So I know, Quincy, you have some thoughts on what we've seen thus far. And then last, we'll preview the week ahead as we always do. And the ISM and the jobs report are coming this week in addition to a lot more earnings. So you could argue that this is just as big a week as last week because we have about 170 S&P 500 companies reporting in addition to these very important economic data points. So let's get to it. On the market recap, I want to pull out this one theme that we've been hearing from our Chief Technical Strategist, Adam Turnquist.

 

Jeff Buchbinder (02:06):

 

And that is, we're no longer just seeing mega caps go higher. We are starting to see a broadening out of this market. I know Quincy something you and I have talked a lot about. So you know, you can see this from this page, this market performance recap last week. It wasn't just tech, right? I mean, certainly mega cap tech did well, but we saw some gains in energy, right? Almost 2% higher last week. We saw some nice gains in materials, also about 2% higher. And then actually an area you pay close attention to, Quincy, we saw some solid gains in emerging markets, right? Up about 3% in dollar terms. So, I think the you know, this is good news for investors. There's more than just eight stocks to buy. More stuff's working than that.

 

Quincy Krosby (03:02):

 

Well, no, absolutely. I mean, the first sign that we had that we were beginning to broaden out was the Russell 2000, which, you know, kind of shocked people. How could this be? Because it's so populated by those horrible banks, the small and mid cap banks. But that gained momentum, and you started to see some, actually, some buy recommendations for some of those banks. And you started to see those regional banks merging or unwinding some of the commercial real estate loans, unwinding them even at a discount. But, you know, fixing their balance sheet. So the Russell 2000 was that first part of that broadening out, and then the laggards, that's what they wanted to call them. The laggards started to pick up and when the financials, big, big money center banks started to report with positive outlooks, positive revenue growth, the market started to applaud that commentary from the banks.

 

Quincy Krosby (04:02):

 

And the banks started to pick up. And again, the Russell 2000, the small and mid-cap industrials, as you always point out, sneaky industrials gaining it's been a very attractive backdrop for the market, because this is what you want. You don't want the generals leading. It doesn't matter if it's mega tech. It could be any group that leads, because if they start to weaken and start to pull back, you've got nothing left underneath that. And so this is indeed a healthy market. And I want to add that of the names that came out over the last week about 78% of them beat estimates. And according to, you know, one of the data reports that we look at. Since 1994, it's usually about 68% or 64% will beat.

 

Quincy Krosby (05:00):

 

So, this was a strong week. And Jeff, I want to ask you this and see if you agree with me. This market has been discerning. It isn't as if this market, you know, said, gave an A to every single company that came out. We saw Honeywell, we saw Texas Instruments, Microsoft, Netflix, even Tesla getting a slap and saying, hey, wait a minute, you didn't deliver. So I guess when, you know, the valuations are as rich as they are, the market is expecting, you know, a triple play, you know, guidance, bottom line and top line revenue growth.

 

Jeff Buchbinder (05:39):

 

Oh, I definitely agree with that. You know, one other theme we've seen, and we'll show you some earning slides in a little bit, but mm-hmm. <Affirmative>, you know, the reaction to the beats has not been as positive as it has historically. And that's a, at least a small sign that maybe this market needs to take a breather. I mean, we believe that for other reasons, but the reaction just beating, and even if you raise a little bit, you're not seeing these big surges in share prices. I mean, you saw it out of Alphabet <laugh> last week. Yeah. You know, you saw it out of Meta last week, but by and large, when you look at the whole S&P 500, you're not seeing those surges. And you are seeing a little bit more of a discerning market.

 

Jeff Buchbinder (06:20):

 

That's fair. Let's keep going here. Bond market. I mean, one of the big stories last week, we mentioned central banks, right? The Fed is most likely done, but we may get one more hike. But I think the BOJ was maybe even a little bit more interesting, last week, Quincy. I know you have thoughts on this, so that's why the yields went up so much last week. We actually moved above 4% on the 10-year yield before pulling back below it in response to the tweak in BOJ monetary policy, that, I mean, was a surprise to some, you know, Quincy, you speculated that something might be coming, you know, early last week. And then on, I think it was Thursday overnight, you saw reports that, you know, the BOJ was going to maybe tweak its asset purchase program. What should investors take away from that news?

 

Quincy Krosby (07:08):

 

Well, they should take away that Bank of Japan is getting ready to normalize monetary policy. They have the inflation, I know they want to make sure that it is intact. Remember they went through decades of deflation. But the fact of the matter is they are on a trajectory where they are going to get rid of, or dismantle, I should say, dismantle this anachronistic policy tool. They don't need it anymore. And it's keeping them in a place where it's uncomfortable. They know it. And the other point is, and I don't want to look too far ahead, but there is chatter that they've got to raise rates if inflation stays where it is, which is above 2%, now it's just about over 3%. They went up to 4%. It pulled back to about 3%. And for, you know, the central banks, it's 2% of price stability.

 

Quincy Krosby (08:06):

 

So they are in a position that they, I don't think they ever thought they were ever going to be in, because that deflationary mindset had set in so dramatically and so entrenched that I think they find themselves, hey, is this possible? Because that's what happens. And you get so used to where you are that you don't realize where you're headed. And where they're headed is to be the last of the big central banks to start thinking about scaling back. And so that's where we are. The yen is weak today. The bond buying program has picked up. And they know that they have more to do. The question I have, Jeff, is, and I think the market does, is how do they go to that next step? And I wonder if they'll do it in between meetings, because they want to be, you know, away from the traders who have feasted on every move that they have made.

 

Quincy Krosby (09:05):

 

And they put out crumbs to put them off the scent. So I wonder if they'll come in in between meetings. I also want to point out too, that when Chairman Powell on the 26th was speaking, he knew what was coming. You notice how calm he was? Do you notice he did nothing to jar the markets in one direction or another? It was probably deliberate because they understood that if they did that it would make it more difficult. Or in other words, jarring the global markets with, you know, raising rates or one way or another. He was quite calm and he was centered and almost neutral. I think he understood that he had to have the backdrop for them to engineer this that evening, late that evening.

 

Jeff Buchbinder (09:56):

 

Yeah, certainly that was the biggest reason why U.S. yields moved higher. But I think it's a positive that markets in Japan were stable. Yeah. And then it's positive that, you know, U.S. bond yields have moved back down a little bit since then. So that's why you saw some losses last week in core bonds, which you're seeing in this table here. You've got the Barclays or the Bloomberg, formerly Barclays, Bloomberg Ag Bond Index, down to about 40 basis points. But we still like bonds a lot here and they've still had a decent year, certainly. And then on the commodity side, energy's been interesting. The you know, the jump in crude oil, maybe it's partly reflecting China's stimulus that, you know, more of it's to come you know, and certainly the economic environment's getting a little bit better in the U.S. of course, we'll talk about that in a bit.

 

Jeff Buchbinder (10:47):

 

So, saw a little bit of a jump in energy prices last week, and then a little bit of a jump in the energy sector last week, as well as I mentioned. I want to, you know, kind of pull out this theme again, of broadening out. We actually talked about it last week on the last Market Signals podcast with Adam Turnquist. We're looking at the equal weight S&P 500 versus the market cap weighted S&P 500. And if the equal weight is doing better, that suggests market breadth. And so the bottom panel here shows you that the equal weight S&P has started to do better. It's actually done better over the last couple months. Not dramatically better but better than the market cap version, which is the one that we all talk about every week.

 

Jeff Buchbinder (11:28):

 

And that, you know, cited in the financial press. And then if you look at the absolute chart, you know, I'm not a technician like Adam, but looks like a pretty good chart to me. I mean, may, it's running up against resistance, but we certainly you know, creating this series of higher highs and higher lows on the equal weight index that suggests maybe that metric can continue to go higher. And then the same concept here, which is the advanced decline line, it's breaking out to all-time highs. The advanced decline lines on the bottom panel, the top panel is the S&P 500. So we have a breakout above these recent resistance levels of 4,200 that we were talking about a lot, couple months back. Now we're making a run at 4,600. But the bottom panel is the one I want to focus on here. The AD line is confirming that this is a broad market rally. So really important point. Again, we want to move away from this narrative of just eight stocks driving the market higher. Good development here, and that can help drive the next leg of this bull market.

 

Jeff Buchbinder (12:40):

 

So let's go to the economic outlook. Quincy, this is where I want to bring you in. So Jeff Roach did the Weekly Market Commentary this week on lpl.com, which is a second half economic outlook. The obvious conclusion from, I think all of this economic data we've seen recently and the market's response to it, is that this market is pricing in higher odds of a soft landing. Now, maybe it's not our base case yet for LPL Research, but it's certainly moving in that direction. So, first point, and I'll send this to you, Quincy is goods spending versus services spending. You know, the question is services spending kind of running out of gas here, or can we continue to see that pent up demand for services drive economic growth in the second half?

 

Quincy Krosby (13:29):

 

Well, you are seeing a potential slowdown in air travel that's already started to seep into the headlines; however, and I do want to add one other thing. There was a little bit of a concern regarding back-to-school sales, because that's a harbinger, as you know, for holiday spending. And holidays actually include, I'm just putting it out there is Halloween, because Americans seem to be absorbed in the Halloween theme and spending quite a bit of money. But again, we don't know what the final numbers are going to be on the back-to-school sale. So that was a concern. And there was also a concern, at least initially, that Americans with lower credit scores were being denied loans, and that some small business owners, you know, lower credit ratings were being denied loans under 70. But much of that data actually is from almost an immediate reaction to the bank crisis.

 

Quincy Krosby (14:29):

 

So, we're going to get another read on this and see where we're headed with loans. Because if that were to continue and intensify, that would obviously be a negative for consumer spending. But the other thing I was going to say is, you know, the Atlanta Fed Now, the GDPNow was right on target for 2.4% GDP for the second quarter. Now for the third quarter, obviously, this is fluid, but right now they're looking at 3.5% for GDP for the third quarter. I mean, that's going to evolve, but that's a good spot to evolve from.

 

Jeff Buchbinder (15:09):

 

Oh, sure, yeah. That we may get, you know, 1% or lower in the third quarter. When all this is said and done. You mentioned consumer headwinds. I mean, certainly credit card borrowing rates north of 20% is a little bit of a headwind. And we're going to see in the week ahead, you know, the consensus for job gains is only about 200,000. We're going to potentially get a one handle there. So clearly job growth is slowing, inflation is coming down, which is good, but wages aren't rising as strongly as

 

Quincy Krosby (15:41):

 

4.4%

 

Jeff Buchbinder (15:43):

 

As they have been well, right? So, you know, still healthy, but not as strong. So you know, maybe we'll grow in the second half, but it's not going to be another two, two and a half percent like we got in the first half. I think that's, I think that's probably what we can all agree on. Turn to, we did get good news on inflation and GDP last week though. You know, the core PCE deflator, the Feds' preferred inflation measure year over year was 4.1 down from 4.6. We could be at the low threes by the end of the year potentially, or low to mid threes potentially. And you see there's a lot of green on this inflation heat map. You know, time goes from left to right, and so you've got virtually every measure, even rents, which has been the stickiest piece of inflation, even rents are starting to show signs of coming down.

 

Jeff Buchbinder (16:31):

 

We've been talking about that for a couple months. You know, data on new leases is showing rental inflation easing. Once you get that piece working in the right direction, you know, we could really get some good inflation data. And by the way, the GDP number, the GDP inflation piece, right, it's quarterly, was 2.2, which is pretty much the Fed target, which is really hard to believe we're here that quickly, given where we just were. You know, I mean, I think the market maybe is declaring victory. <Laugh>, what do you think, Quincy? Is it too early to declare victory on inflation?

 

Quincy Krosby (17:10):

 

No. I mean, look, there's still a tug of war at the Fed. I think, you know, they're coming out of the blackout period, they're going to start speaking. Pay attention to Christopher Waller. He represents that pragmatic hawkish space within the Fed. But there's a tug of war between the hawks and the doves. And the hawks still want to see another rate hike, perhaps as an insurance rate hike. That's what they call it. Given their concern that if you stop you could see a potential jolt higher for inflation. They're very much how do I say, affected by the 1970s, that stop and go. So that may happen, and they may not get core down fast enough. That's the problem. It's still double of what the Fed wants, and they may not have the patience to sit and wait to see it happen.

 

Jeff Buchbinder (18:05):

 

Yeah, I, that's right. I don't think we wanted to declare victory, but the Fed still might be done, and we still might see a steady decline from here, but yeah, of course there's still risks that it pops back up. The annual inflation numbers can be quirky based on the comparisons to year ago. And of course, movement in energy prices can, you know, cause some swings in the headline measures of inflation. So we'll have to watch it. But, sure, moving in the right direction.

 

Quincy Krosby (18:33):

 

We're close, we're close.

 

Jeff Buchbinder (18:33):

 

The right direction based on the last few months, right?

 

Quincy Krosby (18:38):

 

The market knows it. Yeah, the market knows it. The market knows it. The market knows it, the market gets the news before the economic data hits. That's always the case. The market gets the news first. And the market here has gotten the news before this, the strong economic data and the cooler inflation data.

 

Jeff Buchbinder (18:57):

 

Market tends to price in what the world's going to look like in six months. Exactly. So, here's probably the best you know, pic or most encouraging picture of inflation, right? To see headline GDP price index. Yeah. And the headline CPI, look how dramatically these have come down, right? Yeah. And so based on these measures, the Fed pays more attention to core, excluding food and energy. But if you look at headline you know, you could argue most of the work is done. And so in September at the next Fed meeting, when they look at this data and they look at the trajectory of economic growth, which will probably be slowing, you know, it looks like they've probably done enough. Because if the gap between where the Fed is and inflation gets wider, that reflects a tighter position, right?

 

Jeff Buchbinder (19:55):

 

So if inflation falls their position, even if they hold rates steady, gets tighter and has more impact. So I think that's a really important point to make. So let's get into earnings season. This is, you know, my favorite part of the yeah, you, the market story right now. It's been really interesting to hear from companies. And I know you've been, you know, following some of these, you know, the headlines, the transcripts. I mean, I like to just look at the high level data. The data doesn't lie, and it tells you that this has been a really good earnings season. Yeah. You know, we know, you mentioned it before, Quincy, we know that companies beat, right? They lower the bar, they're conservative in their guidance, and then they beat expectations, right? It happens almost every quarter, you know, nine times out of 10.

 

Jeff Buchbinder (20:36):

 

But you want to look at how much they beat by. And then what happens with estimates after they give guidance, that tells you whether it's a good earnings season or not. And so, you see here the, you know, the beat rates actually a little over 80% based on FactSet numbers. You know, whether you, if you use other sources, you might see a slightly different number but right around 80%, that's certainly better than average. As you mentioned, Quincy. If you look at the, you know, down 6% change, that's not a great number of course. But, you know, a couple weeks ago it was down nine. Two points are from Merck by itself, right? The pharmaceutical company had an acquisition related charge. So, you know, we're down about four and a half if you take Merck out, and then if you take energy out, we're up three or four.

 

Quincy Krosby (21:26):

 

Yeah, exactly. Yeah.

 

Jeff Buchbinder (21:28):

 

So, I'm going to, you know, coin a new way to look at earnings. It's earnings growth, ex Merck, ex energy, <laugh>. Okay? I bet that no one's ever heard that measure of earnings season before. We're going to start that here, <laugh>. I think it's just clear that underneath those two pieces, and there's a lot beyond those two pieces, right? 96% of the S&P is outside of those two pieces, <laugh>, right? Yeah, there's a lot of good news here. So you know, estimates have held up really well. The beat rates have been good. The average upside surprise has been good, about six points. So just overall a pretty good earnings season, even though the headline numbers don't look good. Actually, one other point here, a lot of people expected margins to compress further. And they've held up really well too.

 

Jeff Buchbinder (22:17):

 

In fact, if you have flat revenue growth and yet earnings beat, you know, if revenue's in line and earnings beat, then what you have is a margin upside surprise. And that's what we are indeed seeing. So here's the you know, the path of quarterly earnings year over year. You know, we just price this over the weekend. So, you know, closer to down six than down seven, the headline here is that the earnings recession's probably over, right? And buying troughs in earnings is historically a good thing. Now, I guess you could argue the trough really started in April because that was the start of Q2 earnings generation, right? And then, you know, of course now we've got the numbers actually being reported. So this is clearly a piece of why stocks are up nicely, resilient guidance and better than expected results. And so, if we get earnings growth in Q3, Quincy, I think that could help the market continue to go higher. What do you think?

 

Quincy Krosby (23:19):

 

I think so. Especially with policy moving in the right direction.

 

Jeff Buchbinder (23:25):

 

Oh yeah. And, you know, inflation rates, the Fed, all that stuff's behaving. Yeah. And that supports stock valuations. So, if you get good valuation support, because of course, you know, PE ratios are high, if you get valuation support and you get earnings estimates starting to inch a little bit higher, which we've seen in the last, you know, month or two, I think that's a great story for stock. So here's a chart of forward estimates. Now this is a little misleading because you know, you're rolling off July 2023 and then you're adding July 2024. So it's kind of a pro-rated look at earnings estimates. It's not holding the time period steady, but nonetheless there's optimism about 2024. In fact, estimates for 2024 have inch higher too, a little bit, at least in the first half. So you know, if this trend continues, you know, maybe our estimate for 2024 is too conservative. We're looking for 230 in S&P 500 earnings, consensus is a little over 240 that could provide support. So maybe this market's not trading at 20 times, maybe it's closer to 19. So anything else to pull out of the earnings story here? Yeah, Quincy, that you've noticed?

 

Quincy Krosby (24:44):

 

Yes, I think the dollar is going to be a tremendous tailwind rather than the headwind that it has been. And that, you know, we have so many companies from the S&P 500 that really do need a weaker U.S. dollar. And especially as the global growth is still muted, at best, it allows them to compete, compete successfully.

 

Jeff Buchbinder (25:13):

 

Great point. The dollar is a huge swing if it moves. Huge. Yeah. Huge. With about 40% of S&P 500 profits being generated outside the U.S. the dollar falls, earnings get propped up. And so some of these estimates were made when the dollar was stronger. That makes these estimates more conservative and again, allows companies to beat them and allows those estimates going forward to potentially hold up other. So yeah, LPL Research thinks the dollar is going lower, you know, over the next year or two. It's probably going to be a bumpy ride and maybe, you know, maybe gradual. But based on the, you know, different monetary policy dynamics in not just Japan but, but Europe compared to the U.S. and the, just the potential that we move past this, you know, weird post-pandemic economy.

 

Jeff Buchbinder (26:05):

 

We move past this inflation surge and we get to a more normal, who knows what normal is anymore, but we get to a more normal environment, yeah, that should be risk on, that should be dollar lower. We'll have to see. There's still plenty of challenges in Europe and Japan and China, frankly, to work through. But yeah, over the next year or two, that could be a support for earnings. Thanks Quincy for bringing that up. So let's move on. Well, by the way, earnings is huge this week too. I think 170 S&P 500 companies after we get through this week, which will be dizzying, we will pretty much be done, I would say pulling out themes except for maybe with retail. Because retail reports late. But you know, you'll have 80, close to 85% of the S&P 500 reporting after this week. So probably won't be too many surprises after that. But it's also a big week Quincy for economic data. So, what should investors be watching from this calendar?

 

Quincy Krosby (27:05):

 

Well, you mentioned it the ISM reports, Institute of Supply Management, we're going to have, obviously the manufacturing, it's still in contraction territory, but what we're looking for is any flight move higher, especially with new orders, and also hiring expectations. That's going to be very important. If it's less bad, I know that's so scientific, less bad, but the market pays very close attention to that. And again, any inch above 46, which is still contraction territory, towards that line in the sand 50, would be helpful to even suggest that perhaps manufacturing is turning the corner. In terms of the service sector, which is the largest component, that is in expansion territory at 53, the headline report. There too, we're going to look to see new orders. We're going to see anything they're saying about hiring expectations, any special messages. Also, I think we've gotten very used to the fact that prices paid component has come down. We want to make certain in manufacturing and also in the service sector, that that remains the case. Because if we started to see the prices paid component moving higher, that is going to be something that the market is going to focus on, as will the Fed focus on. So that's what we're looking at. These are very important reports. They move very much in conjunction with market expectations.

 

Jeff Buchbinder (28:39):

 

Oh, absolutely. So, you know, I was exhausted after last week, but I'm not going to get much rest this week. <Laugh>, of course, no.

 

Quincy Krosby (28:48):

 

And payroll. Yeah. The payroll report on Friday, obviously, so. Oh, I must say this. Last time we went through this, the ADP report, the private sector report that comes out before Friday was phenomenal, right? And everyone thought, oh my goodness, that's such bad news, right? That's what we're going to see with the payroll report from the government. Remember, they do not have a strong positive correlation. Perhaps the trajectory is the same, but the government report includes government jobs. But that number that came out after that major monster report from the ADP report was much lower, much lower, but it was still showed a resiliency in the labor market and 3.6% unemployment. The expectations right now are that we maintain 3.6% unemployment. And as you pointed out, we probably bring in about 200,000 new jobs.

 

Jeff Buchbinder (29:48):

 

Yeah, very strange. ADP is probably not a bad estimate this time. I mean, the track record, what do we have 14 straight months of better-than-expected jobs numbers. Yeah. So maybe just based, even though we didn't beat last month, maybe the base case should be, you know, 200 to 250. Yeah. But certainly, the ADP estimate this time <laugh> looks a little more realistic. Yeah. That last, that number just never makes much sense to me. So, focus on the government number, the full payrolls, 200,000. If we get a little bit less than that, that's fine. We need to see a little bit of more cooling in the labor market for the Fed to get out of the way, right? And for inflation to come down a little bit further, you know, wages are still a little bit hot in addition to rents still being a little bit hot.

 

Jeff Buchbinder (30:37):

 

And the Fed's not going to declare victory early. They're going to wait until they actually see the evidence that inflation's where they want it to be. So, a lot to watch this week. Again, I guess you know, I'll get some rest next week, but not this week. Quincy, you're not going to get any rest this coming weekend, because that's our big national conference. And I heard we're going to have about 8,000 people there. That's a big one. So for <laugh>, so for those of you who are making your way out there, LPL advisors, we can't wait to see you and our partners can't wait to see you in San Diego for that. So with that, we'll wrap any closing remarks, Quincy?

 

Quincy Krosby (31:20):

 

I'll see you if you invite me on Thursday from San Diego.

 

Jeff Buchbinder (31:25):

 

Beautiful. Yes. For our call for LPL advisors. So I look forward to that. I just want to thank the research team for being so dedicated and no matter where they are, Quincy, yourself and others, no matter where you are, you jump on these calls, which is great. So thanks everybody. Thank you Quincy first of all, and thank you for all of our listeners to the LPL Market Signals Podcast. Have a wonderful week, and we'll be back with you next week. We'll see you then. Thanks so much.