Stocks Flat Again

The S&P 500 has been within 1% of its record high for a few days. It still couldn’t break out on Thursday. It was down 0.14%. The Nasdaq was up 0.24% which means it extended its winning streak to 8 days which is its longest streak since October. Amazon stock was up 0.64% to a new record high which means it is about to be the next company to reach a $1 trillion valuation; its current market cap is $932 billion.

New Samsung Note 9

Samsung unveiled its latest Note device which will cost $1,000 or $1,250 depending on which model you want. This further opens the door for Apple to raise prices on its high-end devices. If the next iteration of the iPhone X costs $1,000 again, the new larger full-screen device could cost about $1,200. Premium device sales will grow Apple’s profits for another year which means it can maintain its $1 trillion valuation and help the Nasdaq keep up its momentum in the near term. Apple is susceptible to weakness in consumer spending, but there’s no indication the consumer will weaken in the next few months as the Redbook report was great. There will likely be another strong holiday shopping season since the labor market is strong.

Energy Lags

The energy sector was the worst performer again as it was down 0.89%. The energy sector is down 5.2% since May 21st. That doesn’t sound like a huge decline, but it means the sector has underperformed the overall market by a lot. The S&P 500 was up 0.44% in that period, meaning energy has lagged about 5.6% in about 12 weeks. Telecom was the best performing sector because treasury yields fell. It was up 0.98%.

Less Greed, Still Overbought

I have been bearish in the near term and neutral in the medium term. I have been moderately bearish because the market has run too far. With the Thursday pullback, the CNN Fear and Greed index fell from 74 to 71 which still signals greed. I think the market needs to fall a bit more to eventually rally again and take out the record high. Technically speaking, you’d rather the market fall about 3% now than have a false breakout where it hits a new record and then craters about 5%. I don’t think there’s any risk of a double top given the great earnings season and momentum the internet firms have. Amazon and Apple have a big say in where the market goes.

Strong Dollar

One big reason why the S&P 500 hasn’t reached a new record is because the dollar has been so strong. The dollar index was up sharply on Thursday from $95.18 to $95.62. This may not seem like much, but it is important because it is the highest level since July 2017. It looks like the dollar will continue its bull market as the U.S. economy remains a source of strength and the Fed continues to raise rates. The American economy outperforming is great for stocks in the short run, but can bring problems because of the strong dollar and rate hikes. There is now a 71.2% chance the Fed raises rates at least 2 more times this year.

Treasuries Rally

Even with great earnings reports pushing stocks up, heightened inflation, and the 4.1% Q2 GDP growth rate, the 10-year yield still can’t get above 3%. I think that’s a strong sign it won’t go much higher this cycle. Two months ago, I predicted the yield wouldn’t get above 3% again this cycle and then it got above 3% for one day. I will admit I was wrong, even though it was just one day. Either way, I still expect the 10-year yield to be range bound at best. It fell 3 basis points on Thursday to 2.93%.

Even though the Fed funds rate predicted a slightly higher chance of 2 rate hikes, the 2-year yield fell 2 basis points to 2.65%, which means the difference between the 2 yields is 28 basis points. There hasn’t been any flattening in the curve in the past month. There have been a few stretches this cycle even longer than this where the curve has steepened or stayed the same. This explains why this cycle has been so long. In less than a year, it will be longer than the 1990s expansion.

GDP Estimates Fall Sharply

I was correct to mention that the bearish NY Fed Nowcast was more accurate than the bullish estimates as the consensus for Q3 growth has fallen. To be clear, when I say the NY Fed is bearish I mean it is expecting growth below the consensus. It’s not actually bearish; the algorithm simply differs from the others by a wide margin. The CNBC rapid update which averages 9 estimates now has an average and median expectation of only 3.4% growth. That would still be a solid quarter, but it’s bad news to see the estimates falling. The Atlanta Fed model changed its growth estimate from 4.4% to 4.3% based on the wholesale inventories report and the PPI report.

Disappointing PPI Report
Unlike most of the inflation reports which have shown acceleration, the July PPI report was disappointing as the headline inflation rate was flat month over month which missed the consensus for 0.3% growth. The year over year growth rate fell from 3.4% to 3.3%. Core month over month inflation was 0.1% which missed estimates for 0.3% growth. It’s rare to see core inflation increase faster than headline inflation.

Core inflation was 2.7% year over year which was down from June’s reading of 2.8%. Core inflation which excludes trade services was up 0.3% month over month which beat estimates for 0.2% growth. It was up 2.8% year over year which was above June’s growth of 2.7%. This shows trade services suppressed inflation. Trade services were down 0.8%. Inflation was brought down by energy prices which fell 0.5% after rising 0.8% in June. Food prices were down 0.1% which was above last month’s decline of 1.1%. Personal consumption prices were down 0.1% which implies there will be a weakness in Friday’s CPI report.