STOCK MARKET RALLY INFLATES ON WELCOME SIGNS OF DISINFLATION

The Stock Market Saw Some Real Inflation This Week, Largely Because It Saw Signs Of Disinflation In The Consumer Price Index (CPI), Producer Price Index (PPI), And Import‐Export Price Index Reports For July.

They all went the market's way, which is to say they supported the peak inflation narrative.

The gains were broad based and substantive. The S&P 500 scored its fourth straight weekly advance and crossed an important level (4,231) that some will interpret as a telltale signal that the low in June was the low for the bear market.

Notably, the week's gains were secured almost entirely over two trading sessions (Wednesday and Friday). Prior to Wednesday, which is when the CPI report was released, the major indices were all sporting losses for the week. The tepid start was attributed to reservations about the market being due for a pullback after the big run off the mid‐June lows, some caustic revenue warnings from NVIDIA (NVDA) and Micron (MU), and some nervousness in front of the CPI report.

The latter, though, proved to be a major turning point for sentiment. Total CPI was unchanged month‐over‐month and core CPI, which excludes food and energy, was up a smaller‐than‐expected 0.3%. Importantly, the annual pace of total CPI moderated to 8.5% from 9.1% while the annual pace of core CPI held steady at 5.9%, meaning it did not move higher as had been feared.

This understanding triggered a huge upswing in the major indices, as investors relished the idea that inflation might have peaked, that the Fed might be able to temper the pace of its rate hikes, and that the U.S. economy, which learned last week that 528,000 positions had been added to nonfarm payrolls in July, might be able to enjoy a soft landing.

Various Fed officials attempted to downplay the idea of the Fed being ready to take its foot off the rate‐hike pedal, not to mention pivoting in 2023 to a rate‐cut cycle, yet equity market participants seemed to disregard the warnings.

Notwithstanding such warnings, the prevailing view in the stock market was that inflation rates will continue to moderate in coming months and that Fed officials will ultimately be convinced to soften their hawkish‐minded tone as a result. It only helped the stock market's mood to see the PPI data and Import‐Export price data move in the same direction as the CPI data.

Granted stocks were unable to hold a rally effort in the wake of the PPI report on Thursday, but by Friday morning, that move had been written off as just a case of taking some money off the table after a big move. Come Friday buyers were back in action while sellers were a mostly sidelined bunch.

The major indices all went out on a high note in a grinding rally effort on Friday that wasn't matched with heavy volume but which was impressively resilient nonetheless. The S&P 500, which was flirting with 3,600 in mid‐June, settled Friday at 4,280. The close above 4,231 will be seen by some as an important technical and psychological development. That level marked a 50% retracement of the losses suffered between the January 3 closing level (4,796.56) and the June 16 closing level (3,666.77).

Last week, BTIG technical analyst, Jonathan Krinsky, informed CNBC that "Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows." That doesn't mean it is off to the races from here nor does it mean the market is immune from another selloff of some size, but it does resonate for some as a beacon of identifiable downside risk and a reassuring historical precedent.

All 11 S&P 500 sectors closed higher for the week. Gains ranged from 1.2% (consumer staples) to 7.1% (energy). Cyclical sectors saw some of the biggest gains and value stocks outlegged growth stocks in a move that showed reduced fears about the economy suffering a hard landing. The Russell 3000 Value Index increased 3.9% versus a 3.0% gain for the Russell 3000 Growth Index.

There was also a revival this week of speculative activity that translated into huge percentage gains for many of the so‐called meme stocks, as well as the SPAC and profitless story stocks that were all the rage last year. Their moves were clear reflections of a risk‐on mindset driven by the hope that the Fed won't have to go as far as it thinks into restrictive rate‐hike territory.

The Treasury market wasn't as convinced of that point as the stock market seemed to be. The 2‐yr note yield, which is sensitive to changes in the fed funds rate, ended the week up two basis points at 3.25%, virtually unchanged from where it was when the CPI report was released on Wednesday. The 10‐yr note yield settled the week up one basis point at 2.84%, up about five basis points from where it was trading before the release of the CPI report.

To be sure, inflation moderated in a welcome development, but it is still unacceptably high. The Fed's inflation target is 2.0%, whereas CPI is up 8.5% year-over-year and PPI is up 9.8% year‐over‐year. There is a lot more room for inflation improvement and there needs to be a lot more improvement to convince the Federal Reserve that inflation is back under control.

That will be an ongoing war, but there was no doubt that the stock market won the mental battle this week in seeing what it wanted to see, which was a lower inflation rate in July than it saw in June.

• Dow Jones Industrial Average: +2.9% for the week / ‐7.1% YTD

• S&P Midcap 400: +4.4% for the week / ‐8.0% YTD

• S&P 500: +3.3% for the week / ‐10.2% YTD

• Russell 2000: +4.9% for the week / ‐10.2% YTD

• Nasdaq Composite: +3.1% for the week / ‐16.6% YTD

MARKET STEERS ITS WAY TO THIRD STRAIGHT WINNING WEEK

The First Week Of August Ended Up Being Another Winning Week For The Stock Market. It Wasn't An Easy Ordeal, Yet Market Participants Largely Retained The Positive Mindset That Prevailed Throughout July.

Things started on a somewhat weak note. There were some assumptions that the market would face selling pressure after the huge move it made in July. That rang true in the first part of the week but not so much in the latter part of the week. Fittingly, market participants got over the selling hump on Wednesday (hump day), which proved to be the big difference in making this another winning week.

The cautious start to the week coincided with a relatively weak ISM Manufacturing Index for July, a sizable drop in oil prices on demand concerns, and saber-rattling by China in front of an expected visit to Taiwan by House Speaker Pelosi.

The latter visit happened on Tuesday, but China's initial response wasn't deemed proportional to the bluster it was expressing in front of the visit. China ultimately announced that it would hold live-fire military exercises near Taiwan. On Friday, China announced that it will be sanctioning Ms. Pelosi and her family, and cutting back on cooperation with the U.S. on certain matters like climate change initiatives.

The lack of a more consequential response was a catalyst for a broad-based rally on Wednesday, which also featured strong leadership from the mega-cap stocks and another sizable drop in oil prices even though OPEC+ said it was going to raise output in September by 100,000 barrels per day versus July and August when it increased its production quota by 600,000 barrels per day.

WTI crude prices slumped below $90.00 per barrel this week, settling Friday at $88.73 per barrel. That move undercut the energy sector, which was the worst-performing sector this week with a 6.8% decline (including a 2.0% gain on Friday). The best-performing sectors were the information technology (+2.0%), consumer discretionary (+1.2%), and communication services (+1.2%) sectors.

The mega-cap stocks were influential sources of support at the index level most of the week. That was evident in the standing of the vanguard Mega-Cap Growth ETF (MGK). It gained 1.8% for the week versus a more modest 0.4% gain for the S&P 500 and an even smaller 0.1% gain for the Invesco S&P 500 Equal Weight ETF (RSP).

That performance made an important difference in the continued outperformance of the growth indexes, as did the relative strength in many smaller-sized companies. The Russell 3000 Growth Index jumped 1.6% this week versus a 0.2% decline for the Russell 3000 Value Index.

This week was not without its speculative flair either. There were some major short squeezes in a number of stocks and AMTD Digital (HKD), which opened for trading at $13.00 per share on July 15, went as high as $2555.30 on Tuesday, August 2, on no news. Its price action became the news.

Switching gears, there was a ton of earnings news this week. The companies reporting didn't have the cachet of last week's reporters. Nonetheless, they generally carried the mantle of providing better-than-feared results, which was still good enough to keep buyers interested.

The earnings news took a backseat to the July employment report as the week progressed. There was some skittishness ahead of that report given the manner in which it could shape the market's perspective on the path of Fed policy.

The report ended up being much stronger than expected. Nonfarm payrolls increased by 528,000, the unemployment rate fell to 3.5%, and average hourly earnings were up 5.2% year-over-year. The key takeaway was that it squashed the friendly notion that the Fed can turn friendly with its monetary policy decisions sooner rather than later.

The Treasury market took that view to heart. The 2-yr note yield, which hit 2.80% earlier in the week and stood at 3.05% right in front of the report, settled Friday's session at 3.23% (up 33 basis points for the week). The 10-yr note yield, which hit 2.53% earlier in the week and stood at 2.70% right in front of the report, settled Friday's session at 2.84% (up 20 basis points for the week).

Initially, the stock market was rattled by the report and the move in market rates, but it eventually found its nerve and put together a nice rebound effort. Friday's session did not culminate in gains for each of the major indices, but the overall performance was better than what many feared it would be based on the shifting rate-hike expectations.

Prior to the report, the fed funds futures market was assigning a 34% probability to a 75-basis point rate hike at the September FOMC meeting. That probability shot up to 68.5%, according to the CME's FedWatch Tool, in the wake of the report.

The relative resilience of the stock market after the employment report squashed its seemingly preferred outcome (i.e. weak data that suggested the Fed will be lowering rates in the first half of 2023) likely revolved around two, alternative takes on the data:

1. The continued strength of the labor market shows that the economy can handle the Fed's rate hikes without devolving into a hard-landing scenario, or

2. Employment is a lagging indicator, and given the lag effect of the Fed's rate increases, there will be much weaker numbers in coming months that will invite a friendlier shift in monetary policy sooner rather than later

It is hard to say what the ultimate driver of sentiment was, but because the market stood its ground for the most part after the report, the S&P 500 scored its third straight winning week.

• Dow Jones Industrial Average: -0.1% for the week/-9.7% YTD

• S&P Midcap 400: -0.3% for the week/-11.9% YTD

• S&P 500: +0.4% for the week/-13.0% YTD

• Russell 2000: +1.9% for the week/-14.4% YTD

• Nasdaq Composite: +2.2% for the week/-19.1% YTD

A BIG WEEK OF GAINS CLOSES OUT A HUGE MONTH FOR THE STOCK MARKET

Anyone Following The Market This Week Has A Right To Feel Exhausted Going Into The Weekend. 

It was a huge of week of news that was ultimately matched with some big gains for the week that padded some huge gains for the month, which were driven in part by short-covering activity and a bid to add back exposure to equities following the brutal first half of the year.

Briefly, roughly 175 S&P 500 companies reported their results for the June quarter, the FOMC held a policy meeting, the economic calendar featured the Advance Q2 GDP Report, President Biden held a call with President Xi mainly to discuss Taiwan and Russia, Senator Manchin had a stunning reversal of position and reached an agreement with Senator Schumer on the provisions for the Inflation Reduction Act of 2022, and Congress passed a $280 billion bill, which included $52 billion for increasing semiconductor manufacturing capacity, that is designed to fend off competition from China.

Tucked in between was a halting earnings warning from Walmart that was pinned on food and fuel inflation detracting from spending in general merchandise categories, a warning from Best Buy about a further softening in demand for consumer electronics, a warning from Stanley Black & Decker about weakening customer demand, the highest year-over-year reading for the PCE Price Index (6.8%) since 1982, the third straight monthly drop in Consumer Confidence, and a bleak New Home Sales report for June.

The bad news, however, didn't derail the stock market, which locked in on better-than-feared results and/or guidance from Alphabet, Microsoft, Apple, and Amazon.com, a marked drop in Treasury yields, and the idea that the weak economic data would compel the Fed to take less aggressive steps with future rate hikes.

The Federal Reserve was central to this week's action. It raised the target range for the fed funds rate on Wednesday by 75 basis points to 2.25-2.50%, as expected. Fed Chair Powell, however, did a commendable job at his press conference of walking the line between needing to be tough still on fighting inflation but conceding that it would likely be appropriate in coming months to slow the pace of rate increases given how frontloaded the rate hikes have been to this point.

He didn't rule out another 75-basis point rate hike at the September meeting. He said the data would dictate that decision. He also said that the Fed wouldn't be offering any clear-cut guidance like it had been doing but would instead let the data dictate policy decisions now on a meeting-by-meeting basis.

There was ample room for interpretation in the wake of his remarks, but the prevailing view of the market was that Mr. Powell opened the door to the Fed taking a step down with its aggressive rate-hike posture. That was enough to launch a post-FOMC rally on Wednesday that was sustained through Friday's close.

Notably, the fed funds futures market is pricing in two rate cuts in the first half of 2023, according to the CME's FedWatch Tool. Mr. Powell didn't say anything that supported such thinking, yet market participants have been seemingly clinging to an expectation that weakening economic data will be the pivot point for the Fed.

The second straight quarter of a contraction in real GDP (-0.9%) contributed to that view; meanwhile, the Treasury market moved in a direction that corroborated that thinking. The 2-yr note yield dropped nine basis points this week to 2.90% and the 10-yr note yield fell 14 basis points to 2.64%, leading to a further inversion of the 2s10s spread that is seen by many as a harbinger of weak growth and/or a recession.

In that vein, it would be remiss not to point out that growth stocks once again led this week's rally effort. The Russell 3000 Growth Index rose 4.9% versus a 3.4% gain for the Russell 3000 Value Index.

Clearly, though, the otherwise solid 3.4% gain in the Russell 3000 Value Index underscored that there was broad-based buying interest. All 11 S&P 500 sectors gained ground this week with gains ranging from 1.6% (consumer staples) to 10.3% (energy). The latter closed out a huge week on the back of stronger-than-expected earnings results from Chevron and Exxon Mobil.

For the month, every sector advanced. Gains ranged from 3.1% (consumer staples) to 18.9% (consumer discretionary). A surge in Tesla and Amazon.com paved the way to that massive gain for the consumer discretionary sector, which is still down 20.4% for the year.

Altogether the Nasdaq Composite soared 12.4% in July followed by the S&P Midcap 400 (+10.8%), the Russell 2000 (+10.4%), the S&P 500 (+9.1%), and the Dow Jones Industrial Average (+6.7%). The S&P 500, which flirted with 3,600 in mid-June, closed July at 4,130.29.

• Dow Jones Industrial Average: -9.6% YTD

• S&P Midcap 400: -11.6% YTD

• S&P 500: -13.3%

• Russell 2000: -16.0%

• Nasdaq Composite: -20.8%

STOCKS FIND A RALLY CATALYST IN FACE OF WEAK ECONOMIC DATA

Headlines That Reinforced A Slower Growth Environment Were Persistent This Week, But Just As Persistent -- Or Resilient We Should Say -- Was The Stock Market. It Did Not Let The Growth Worries Get It Down.

In fact, it traded through the growth worries to record a winning week that had been looking a lot better before Snap went crackle pop in the wake of its Q2 earnings report and dour view of conditions for online advertising.

Before the Snap news after Thursday's close, the Nasdaq Composite was up 5.2% for the week and the S&P 500 was up 3.5% for the week. They would eventually close the week with gains of 3.3% and 2.5%, respectively, while the S&P Midcap 400, Russell 2000, and Dow Jones Industrial Average gained 4.0%, 3.6%, and 2.0%.

In turn, they all reclaimed a posture above their 50-day moving average and the S&P 500 briefly traded above 4,000 on Friday after flirting with 3,600 in mid-June.

Overall, it was a good week for stocks despite Friday's pullback but not a good week for the economic outlook. Specifically:

• The July NAHB Housing Market Index fell to 55 from 67, registering its biggest monthly drop on record outside of the drop seen in April 2020.

• June housing starts were weaker than expected and building permits (a leading indicator) for single-unit dwellings fell in every region.

• Existing home sales were weaker than expected in June and declined for the fifth straight month.

• Initial jobless claims topped 250,000 for the first time since mid-November 2021.

• The July Philadelphia Fed Index fell to -12.3 from -3.3, paced by a sharp decline in the new orders index.

• The June Leading Economic Index decreased 0.8%, which was the fourth consecutive decline, prompting the Conference Board to suggest that a U.S. recession around the end of this year and early next year is now likely.

• The preliminary July IHS Markit Manufacturing PMI slipped to 52.3 from 52.7 while the IHS Markit Services PMI slumped to 47.0 from 52.7 (a number below 50.0 is indicative of a contraction in business activity).

On top of the economic data, Apple, Alphabet's Google, Microsoft, and Snap were reported to have indicated that they plan to slow their hiring activity.

The deteriorating economic environment registered more in the Treasury market than it did in the stock market. The 2-yr note yield fell 14 basis points for the week to 2.99% and the 10-yr note yield fell 15 basis points for the week to 2.78%. The inversion, whereby shorter-dated securities yield more than longer-dated securities, is a reflection of growth concerns and is seen by some as a harbinger of a possible recession.

The recession view didn't register in the stock market -- not this week anyway. The best-performing sector was the consumer discretionary sector (+6.8%), which was helped by a huge move in Tesla after its better-than-feared Q2 report, followed by the materials (+4.1%), industrials (+4.1%), information technology (+3.6%), and energy (+3.5%) sectors.

Conversely, two of the three sector losers this week were the countercyclical health care (-0.3%) and utilities (-0.5%) sectors.

It was the communication services sector (-1.2%), though, that was the worst-performing sector this week. Netflix did what it could do to lend support, rallying nicely after its better-than-feared Q2 earnings report; however, some gloomy earnings results and/or guidance from AT&T and Verizon, coupled with the retreat in Alphabet and Meta Platforms after Snap's disappointment, undercut the sector. Snap for its part plummeted 39% on Friday.

The stock market behaved as if the bad economic news and more challenging earnings environment heard throughout the week was not a surprise. It wasn't in one respect, as the fallout in the first half of the year was largely predicated on a belief that the stock market would be dealing with the bad economic news and more challenging earnings environment it heard about this week.

Aside from that, though, the stock market found a rally catalyst on Tuesday in the BofA Global Fund Manager Survey, which revealed the lowest equity allocation since the Lehman Bros. crisis and the highest cash level since 2001. This news became the focal point for a contrarian-minded approach that supported the market throughout the week.

It overshadowed the poor economic data, as well as the first rate hike from the ECB in 11 years that was more aggressive than most investors expected it would be. Specifically, the ECB raised its key lending rates by 50 basis points when the majority of market participants thought it would raise rates by only 25 basis points. The Bank of Japan for its part left its key lending rate unchanged at -0.10%, as expected.

With clear signs of slower growth and falling long-term rates, it was the growth stocks that took the lead this week in driving the broader market's gains. The Russell 3000 Growth Index was up 3.2% versus a 2.4% gain for the Russell 3000 Value Index. The Philadelphia Semiconductor Index surged 5.5%, aided by reports that the bill that will provide $52 billion for the semiconductor industry should pass the Senate next week.

• Dow Jones Industrial Average: -12.2% YTD

• S&P 400: -15.7% YTD

• S&P 500: -16.9% YTD

• Russell 2000: -19.5% YTD

• Nasdaq Composite: -24.4% YTD

UNABLE TO ESCAPE SELLING PRESSURE AS INFLATION REMAINS IN FOCUS

The Stock Market Endured Another Volatile Week That Began With Three Days Of Selling And Ended With A Rebound That Lifted The S&P 500 Off Its Lowest Level In Nearly Four Weeks.

Still, the benchmark index surrendered 0.9% for the week while the Nasdaq (-1.6%) underperformed and the Dow (-0.2%) finished with a slimmer loss for the week.

The market began the week on an apprehensive note, due in part to hesitation ahead of Wednesday's release of June CPI. In addition, concerns about global growth continued weighing on sentiment. Spain's Prime Minister Sanchez warned that his country is likely to see lower than expected growth in the coming months, Shell CEO warned that Europe may have to ration energy in the winter, and there were reports of a growing number of people in China boycotting their mortgage payments.

Renewed political turmoil in Italy after Prime Minister Draghi lost support of a major coalition partner briefly drove the euro below parity against the dollar, helping the U.S. Dollar Index secure its third consecutive weekly gain with the Index reaching its highest level since September 2002.

Wednesday saw the release of the June CPI report, which showed a 1.3% month-over-month increase that lifted the yr/yr growth rate to 9.1%, a level not seen since late 1981. The food index was up 9.1% year-over-year while the energy index was up a stunning 41.6% year-over-year. Thursday's release of the June PPI report did little to soothe fears about inflation as headline PPI increased 1.1% month-over-month, lifting the yr/yr PPI rate to 11.3%, just shy of the March peak (11.5%).

Bank earnings for Q2 began coming in during the latter part of the week, starting with disappointing reports from JPMorgan Chase and Morgan Stanley. Comments from JPM CEO Dimon received a lot of attention after he expressed worries about unprecedented tightening in the face of significant global turmoil.

Equities finished their down week on a positive note, drawing some support from the preliminary University of Michigan Consumer Sentiment survey for July, which showed an improvement in sentiment due to a dip in inflation expectations after the recent drop in energy prices. This was a positive development, but it could be reversed in a flash if energy prices continue rebounding. WTI crude fell past its 200-day moving average (93.57) to a level not seen since late February on Thursday but bounced to finish Friday's session $7.38, or 8.2%, above its low from Thursday.

NASDAQ PACES POST-HOLIDAY RALLY

Equities Climbed During The Holiday-Shortened Week, Allowing The Dow (+0.8%), S&P 500 (+1.9%), And Nasdaq (+4.6%) To Reclaim The Bulk Of Their Losses From The Previous Week.

The market got off to a shaky start on Tuesday but recovered after finding support above lows from the previous week. The Tuesday bounce opened the door to an extension of the rebound over the coming days with sectors like communication services, consumer discretionary, and technology leading the market higher. The three groups gained a respective 4.9%, 4.6%, and 4.3%, distancing themselves from their mid-June lows.

Looking deeper in the tech sector, chipmakers were among the best performers with heavyweights like AMD and NVIDIA rising off their lowest levels in at least a year while the PHLX Semiconductor Index gained 6.5%, narrowing its year-to-date loss to 33.7%.

Crude oil faced pressure at the start of the week, falling past the $100.00/bbl mark to a level not seen since late April. Concerns about global growth fueled the selling on Monday and Tuesday, in turn emboldening the advance in the equity market. However, the next two days saw a bounce that lifted the energy component back above $100. WTI crude ended the week at $105.06/bbl, down $3.41 or 3.1% since last Friday.

The shortened week featured the release of the June FOMC Minutes, in which policymakers acknowledged the risk for a slowdown in growth from tighter policy and a concern that higher inflation could become entrenched if the public begins questioning the Fed's resolve. Policymakers agreed that moving to a restrictive policy stance is appropriate.

Treasuries gave back the bulk of their gains from the week before, lifting the 10-yr yield back above its 50-day moving average (3.003%). The benchmark yield increased by 21 bps to 3.10% for the week while the 2-yr yield rose 29 bps to 3.12%, inverting the 2s10s spread once again.

The U.S. Dollar Index climbed nearly 1.8% during the past week, reaching a level not seen since October 2002. The bulk of the strength took place at the euro's expense amid ongoing concerns about the impact of high energy prices on the European economy.

GROWTH CONCERNS DRIVE ANOTHER LOSING WEEK FOR THE MARKET

The First Day Of July Was A Good One For The Stock Market, And Perhaps Something To Build On As The Second Half Of The Year Progresses.

Still, it was not enough to save the stock market from another losing week that encompassed the worst first half of a year for the S&P 500 since 1970.

The main story lines were all too familiar.

There were concerns about economic growth, earnings growth, inflation, and central bank rate hikes. There was notable weakness in the mega-cap stocks and semiconductor shares. There was notable relative strength in the energy sector and the counter-cyclical sectors.

The S&P 500 declined 2.2% this week and the Nasdaq Composite sunk 4.1%. The Vanguard Mega-Cap Growth ETF (MGK) was down 4.4%. The Philadelphia Semiconductor Index plummeted 9.6%. The S&P 500 energy sector gained 1.3%. Meanwhile, the S&P 500 utilities sector jumped 4.1% while the S&P 500 health care and consumer staples sectors rose 0.4% and 0.3%, respectively.

This week had its challenges, including another dump of cryptocurrencies after the SEC blocked Grayscale's bid to turn its bitcoin fund into a spot ETF. If one wanted to gain a good feel for the growth concerns that were ever present this week, however, one need only look at the Treasury market.

The yield on the 2-yr note sank 23 basis points to 2.83% while the yield on the 10-yr note dropped 24 basis points to 2.89%. Those moves were catalyzed by some disappointing economic data that included a weaker-than-expected Consumer Confidence Index for June that featured the lowest reading for the Expectations Index (66.4) since March 2013 and a bump in the year-ahead inflation expectation to 8.0% from 7.5%.

That news was followed later in the week by the Personal Income and Spending Report for May, which featured a 0.4% decline in real personal spending and a still elevated 4.7% year-over-year change in the core-PCE Price Index, and the softest ISM Manufacturing PMI reading for June (53.1%) since June 2020.

Taking a cue from some of these inputs, the Atlanta Fed's GDPNow model estimate for real GDP growth in the second quarter was cut to -2.1% from -1.0%. The third estimate for Q1 GDP, released earlier in the week, showed a 1.6% decline in real GDP. If real GDP in Q2 is in fact negative, it will fit the technical definition of an economy being in recession.

The weak data notwithstanding, Fed commentary during the week still leaned to the hawkish side. San Francisco Fed President Daly (not an FOMC voter this year) started things on Monday with an acknowledgment that she sees scope for additional tightening beyond the neutral rate. Cleveland Fed President Mester (FOMC voter) said she supports a 75-basis point rate hike at the July meeting if conditions remain the same (note: that was before the real PCE and ISM numbers).

Fed Chair Powell, meanwhile, told an ECB Forum that the importance of fighting inflation is worth the risk of slowing economic activity too much since failing to restore price stability would be the bigger mistake.

Even so, the Treasury market and the fed funds futures market downgraded their views with respect to the Fed's policy trajectory. That didn't seem to provide a lot of support to stocks, however, given that it was based on an expected bad economic outcome that won't bode well for earnings growth.

On a related note, semiconductor maker Micron issued fiscal Q4 (Aug) revenue and EPS guidance after Thursday's close that was well below consensus estimates and which it attributed to a weaker demand environment for smartphones and PCs. General Motors followed Friday morning with a reduced Q2 net income outlook that it pinned on supply chain problems that adversely impacted its wholesale volumes in Q2. Importantly, GM reaffirmed its full-year guidance ranges.

This news was absorbed along with the soft ISM number, yet the stock market managed to score some needed gains on Friday in front of the holiday weekend. 

The resilience on Friday was presumably helped by new money being put to work on the first day of a new month and the price action itself, which is to say there were ample news catalysts to fuel further downside action, yet prices still moved higher, creating a sense that the bad news -- or most of it -- has been priced in to a large extent already.

The rebuttal to the latter point, however, would be the performance of the Philadelphia Semiconductor Index. It was down 33.9% for the year entering Friday, and yet it fell another 3.8% in Friday's trade in the wake of Micron's warning and a Digitimes report that Taiwan Semi has seen major clients reduce their orders.

As a reminder, markets will be closed Monday in observance of Independence Day.

• Dow Jones Industrial Average: -14.4% YTD

• S&P 400: -19.2% YTD

• S&P 500: -19.7% YTD

• Russell 2000: -23.1% YTD

• Nasdaq Composite: -28.9% YTD

A comeback week

Friday's Session Put A Punctuation Point On A Comeback Week For The Stock Market. It Was A Short Week, But It Was Long On Big Gains For The Major Indices.

For some perspective on that, consider that the S&P Mid Cap 400 was the weakest performer and it was up 5.1%!

Of course, the major indices had a lot of recovery room. Entering the week, they were down between 7.0% and 12.3% for the month.

What transpired this week was a momentum-driven bounce from a deeply oversold condition. It wasn't a blanket rebound effort, however. There was some precision in the rebound strike, which was oriented around growth concerns.

That might sound silly given the scope of the gains, yet it resonates in this week's leadership groups. 

Specifically, the mega-cap stocks, which were accorded some benefit of the doubt that their earnings would hold up better in a more challenging economic climate, were standouts. The Vanguard Mega-Cap Growth ETF (MGK) surged 8.0%. Be that as it may, it is still down 3.6% for the month and 26.4% for the year.

The strength of the mega-cap stocks fortified the performance of the consumer discretionary (+8.3%), information technology (+7.3%), and communication services (+7.0%) sectors. However, their relative strength was largely overshadowed this week by the relative strength of the countercyclical sectors and the relative weakness of the cyclical sectors.

To wit: the health care (+8.2%), utilities (+7.2%), and consumer staples (+6.6%) sectors all outperformed the S&P 500, whereas, the energy (-1.6%), materials (+2.7%), industrials (+4.2%), and financial (+5.1%) sectors all underperformed the S&P 500. If it wasn't for Friday's surge, the performance disparity would have been even greater.

Growth concerns were a permanent feature this week. They manifested themselves as well in the outperformance of the growth stocks versus the value stocks, and in the large-cap stocks versus the small and midcap stocks. They were also evident in other markets.

The 2-yr note yield dropped 12 basis points this week to 3.06% after dipping below 2.90% earlier in the week. The 10-yr note yield dropped 11 basis points this week to 3.13% after flirting with 3.00% earlier in the week. Elsewhere, WTI crude futures dropped to $101.53/bbl on Wednesday before rebounding to $107.65/bbl on Friday, down fractionally for the week. Copper futures traded as low as $3.64/lb on Friday (down 9.2% for the week) before settling the day at $3.74/lb.

Growth matters were also a focal point in the Q&A portion of Fed Chair Powell's Semiannual Monetary Policy Testimony to the Senate Banking Committee on Wednesday and the House Financial Services Committee on Thursday. Not surprisingly, there was some wonderment about how the Fed is going to achieve a soft landing with an aggressive rate-hike approach. Fed Chair Powell acknowledged that doing so will be challenging.

Better-than-expected full-year guidance from FedEx (FDX) after Thursday's close, however, tempered some of the growth concerns at the end of the week along with the reassurance from the Fed's stress test that banks would still have sufficient capital levels to keep lending under a severe recession scenario.

That news, combined with some surprisingly strong new home sales data for May, powered a broad-based rally effort on Friday that led the market to its first winning week this month. In turn, the S&P 500 successfully crossed the 3,800 and 3,900 levels on Friday and closed near its high for the day.

• Dow Jones Industrial Average -13.3%YTD

• S&P 500: -17.9% YTD

• S&P 400: -17.9% YTD

• Russell 2000: -21.4% YTD

• Nasdaq Composite: -25.8% YTD

Waning faith in central banks leads to continued de-risking from stocks

Central Banks Were At The Center Of This Week's Trading Action, And Judging By The Stock Market's Weakness, The Central Banks Were Anything But Supportive.

On the contrary, the stock market broke down because faith in the Federal Reserve -- and other central banks -- in being able to skirt a recession also broke down.

The breakage, though, had to do with more than just the rate-hike actions from the central banks. It also had to do with liquidity concerns that rocked the cryptocurrency market, earnings concerns that gripped the entire stock market, growth concerns that undercut many commodity prices and drove junk bond spreads to their widest since November 2000, and excessive volatility in the Treasury market that rattled investor confidence.

The week began on an unnerving note with cryptocurrency prices coming undone on the news that crypto lender Celsius had suspended customer withdrawals and transfers. That drove some panicky selling and fueled angst about forced selling to meet margin calls that persisted all week. Bitcoin started the week just above $25,000.00. As of this writing, it was just above $20,000.00.

There wasn't any place to hide this week, except perhaps the U.S. dollar. The U.S. Dollar Index jumped 0.5% to 104.67. Otherwise, losses were registered in stocks, bonds, cryptocurrencies, and commodities as recession fears spread far and wide.

Briefly, the S&P 500 slumped 5.8%; the 2-yr note yield jumped 14 basis points to 3.18% after moving as high as 3.43% earlier in the week; the 10-yr note yield increased eight basis points to 3.24% after kissing 3.50% earlier in the week; oil prices dropped 10.1% to $108.46/bbl; natural gas prices plummeted 20.8% to $7.02/mmbtu; and copper futures fell 6.4% to $4.02/lb.

All 11 S&P 500 sectors lost ground with declines ranging from 4.4% (consumer staples) to 17.2% (energy). The Dow Jones Industrial Average fell below 30,000, and each of the major indices set new 52-week lows.

The energy sector, which was -- and still is -- the best-performing sector this year (+31.4%), was arguably the benchmark for the recession trade that dominated the stock market. It broke down on momentum-driven selling interest that was precipitated by concerns about a major slowdown in global demand in coming months as world economies feel the pinch of rapidly rising interest rates.

The Federal Reserve was the focal point, ending a two-day meeting on Wednesday with a decision to raise the target range for the fed funds rate by 75 basis points to 1.50-1.75% and offering updated projections that showed a downward revision to 2022 real GDP growth (to 1.7% from 2.8%), an upward revision to 2022 PCE price inflation (to 5.2% from 4.3%), a stark adjustment in the median estimate for the fed funds rate in 2022 (to 3.4% from 1.9%), and a median estimate placing the Fed's terminal rate at 3.8%.

Fed Chair Powell added at his press conference that the July meeting will likely feature either a 50-basis point or 75-basis point rate hike. He also expressed a commitment to getting inflation under control, but, importantly, he created a sense of uncertainty as to whether 3.8% will ultimately be the terminal rate.

The Swiss National Bank, meanwhile, followed hot on the heels of the Fed with a surprise 50-basis point rate (its first rate hike in 15 years) that matched a similar rate hike from Brazil's central bank. The Bank of England raised its key lending rate by another 25 basis points, as expected, but downgraded its Q2 GDP forecast to -0.3% as a whole. The latter forecast was heard in conjunction with a report that the Atlanta Fed's GDPNow model estimates no growth in real GDP in Q2 versus a prior projection for 0.9% growth.

The Bank of Japan for its part continued to play the role of outlier. It left its key policy rate unchanged at -0.1% and maintained a commitment to yield curve control with an aim of keeping the 10-yr JGB yield around zero percent. That decision didn't sit well in the forex market. The yen fell 2.1% against the dollar on Friday to 134.96.

Separately, the ECB held an emergency meeting on Wednesday to develop a plan to mitigate the bond fragmentation issues afflicting confidence in the eurozone's outlook.

In sum, there were widespread worries about the current policy approaches being pursued by the central banks. The fear of a policy mistake was wrapped up in all of them. The principal driver, though, boiled down to growth concerns that revolved around stagflation and recession. 

Neither outcome would bode well for the earnings prospects for most companies, which is why most stocks fell prone to further selling interest this week. Effectively, there was a loss of faith in current earnings estimates that went hand-in-hand with the waning faith in central banks to control inflation without inviting a recession.

Accordingly, the de-risking from stocks continued to be the default position.

• Dow Jones Industrial Average: -17.7% YTD

• S&P 400: -21.9% YTD

• S&P 500: -22.9% YTD

• Russell 2000: -25.8% YTD

• Nasdaq Composite: -31.0% YTD

GROWTH CONCERNS AT THE HEART OF LARGE LOSSES

The Major Indices Pushed Higher On Monday And Tuesday, But From Wednesday To Friday It Was All Downhill. It Was A Steep Decline, Too. After Tuesday's Session, The S&P 500 Was Up 1.3% For The Week. By The Close On Friday, The S&P 500 Was Down 5.1% For The Week And Sitting At 3,900. 

A succinct summation of this week's action boils down to a contention that growth concerns were at the heart of it. There were multiple developments contributing to those concerns:

• Target cut its Q2 operating margin guidance to around 2%, only three weeks after saying it would be 5.3%, citing a need to clear excess inventory.

• Intel said the macro environment has been weaker and that circumstances at this point are much worse than it had anticipated coming into the quarter.

• Scotts Miracle-Gro slashed its FY22 EPS outlook well below the consensus estimate, noting its fixed cost structure has seen significantly greater pressure due to replenishment orders from retail partners not being what it expected since mid-May

• WTI crude futures went as high as $123.18/bbl while natural gas futures hit $9.66/mmbtu.

• The OECD cut its 2022 global GDP view to 3.0% from 4.5% and the Atlanta Fed's GDPNow model estimate for Q2 was reduced to 0.9% from 1.3%.

• The Reserve Bank of Australia and the Reserve Bank of India both raised their key policy rates more than expected.

• The ECB said it intends to raise its key interest rates by 25 basis points at the July meeting and that it will follow suit with more rate hikes in September and beyond. It also announced the end of its net asset purchase program on July 1 and raised its 2022 annual inflation forecast to 6.8% from 5.1% and its 2023 annual inflation forecast to 3.5% from 2.1%.

• Several Shanghai districts were back in lockdown for COVID testing and entertainment venues in a Beijing district were closed amid COVID concerns.

• The Index of Consumer Sentiment for June hit the lowest level on record (50.2) dating back to 1978.

• Total CPI increased 8.6% year-over-year in May, marking its largest increase since December 1981. Core CPI was up 6.0% year-over-year, down from 6.2% in April but still a long way from the Fed's longer-run inflation goal of 2.0%.

The latter was the punctuating factor in an otherwise lousy week, as it sparked concerns about the Fed pursuing more aggressive policy actions to get inflation under control. Those concerns showed up in the Treasury market on Friday, as well as in the stock market.

The 2-yr note yield spiked 22 basis points to 3.04% following the CPI report while the 10-yr note yield jumped 11 basis points to 3.16%. That left the 2s10s spread at just 12 basis points versus 27 basis points when the week began.

The S&P 500 for its part fell nearly 3.0% on Friday (the Nasdaq dropped 3.5%) on broad-based selling interest. The main issue for market participants wasn't just the worrisome inflation news. Rather, it was the recognition that the Fed is apt to be more aggressive with its policy actions, which will crimp economic growth prospects and, in turn, crimp earnings prospects.

Accordingly, there were pressing doubts that the market provided true value at current levels because forward earnings estimates have yet to come down in any meaningful fashion despite a lot of writing on the wall that suggests the economic climate ahead is going to be much more challenging.

The selling, therefore, was widespread, finishing off a week that featured losses for all 11 S&P 500 sectors ranging from 0.9% to 6.8%.

The best-performing sector of the week was energy. It declined 0.9%, having been insulated somewhat from the selling that hit hard elsewhere on account of the rise in energy prices. The next best-performing sector was consumer staples, which fell "only" 2.6%.

The hardest-hit sectors this week were financials (-6.8%), information technology (-6.4%), real estate (-6.2%), consumer discretionary (-6.1%), and materials (-5.8%). Separately, the Dow Jones Transportation Average declined 7.5%.

• Dow Jones Industrial Average: -13.6% YTD

• S&P 400: -15.4% YTD

• S&P 500: -18.2% YTD

• Russell 2000: -19.7% YTD

• Nasdaq Composite: -27.5% YTD