Did You Feel It?
The stock market, indeed all financial markets, kind of slept through Thursday. First, the GDP disappointment, and make no mistake, we all heard plenty of economists and other pundits mention how strong 6.5% annualized quarter-over-quarter growth is, but remember, that was peak. We now think there is a good chance that domestic and global economic growth are both "past peak." The only way to paint this second-quarter print as a positive is for large revisions to be made to certain components within the data that impact the headline number.
Markets? They just slowed down. First, Fed Chairman Jerome Powell threaded the needle quite well on Wednesday. He was able for the most part to not impact markets while almost sounding hawkish, and almost sounding dovish. As we mentioned 24 hours ago, "mission accomplished," Mr. Fed Chair.
Second, the GDP print left some in disbelief, with others seeking affirmation that the number was still strong.
Third, everyone in the marketplace still had Amazon (AMZN) to wait (bet) on. Amazon would pull through, right? I mean, this is Amazon. Probably not, but maybe Amazon would announce a stock split with a new sheriff in town. Can't sell ahead of the release. Uh oh.
I will likely get into Amazon later, or even more likely in a separate piece as I don't know if any other stock with the possible exception of Apple (AAPL) is as important to the marketplace and marketplace sentiment. You put together an uncertain Fed with a disappointing economy that cannot shake what is becoming painful (even if it is transitory) consumer inflation. Stir. Now mix in disappointing results and guidance from a major bellwether holding of a broad swath of institutional funds, top it off with an almost comical IPO, and once that's almost done, add in a variant of the SARS-CoV-2 virus that as visibly rattled enough cages across our national and regional leadership.
It is early on Friday morning. Equity index futures are trading lower, but not quite as low as I would have expected as I ripped my gnarly little head away from the wondrous luxury of that thing I call a pillow. Interesting thing about Thursday: As aggregate trading volumes dwindled significantly, the five cyclical sectors led the way as nine of 11 sectors closed in the green. Defensive sectors populated the lower rungs of our performance tables as Treasury yields expanded and precious metals soared. I would expect that "growthy" sectors will lead the way lower on Friday.
Using sector select SPDR ETFs as proxies, Communications Services (XLC) easily underperformed the broader markets on Thursday thanks to a 1.3% smackdown of the Dow Jones US Internet Index. That industry index was weighed upon by the likes of Pinterest (PINS) , DoorDash (DASH) and of course Facebook (FB) as all three closed anywhere from 4% to 6% lower.
Now, Amazon is a software stock, is an Internet stock, is a media stock, but it is classified as a broadline retailer (it also is a holding of Jim Cramer's Action Alerts PLUS charitable trust). That means as Friday's opening bell approaches there should be negative "pin action" across the Consumer Discretionary (XLY) and Information Technology (XLK) sectors as well as the Communication Services sector. Going into a weekend with all three (some say two, some say five) major large-cap indices trading close to all-time highs and well above all three major daily moving averages, markets are poised for profit taking as Amazon likely acts like a riptide to an inexperienced swimmer. (Note: Those who include the Dow Transports among the "five" major large-cap indices and at least observe to some degree Dow Theory saw this coming. Congrats to you.)
I heard and read a lot of cheerleading on Thursday. Gross Domestic Product for the second quarter increased 6.5% quarter over quarter, seasonally adjusted and then annualized. This increase came after a revised 6.3% print for the first quarter. Economists for the most part expected to see growth of at least 8%. Demand was there, with the miss coming largely at the hands of supply chain restrictions that tamped down inventories. That much is certainly true. Ex-motor vehicles alone and GDP prints at 7.2% instead of 6.5%. On demand, personal consumption expenditures increased 11.8% as gross private domestic investment hit the tape at -3.5%, largely due to the residential component that led the way lower at -9.0%. Again, constricted supply had a major impact.
However, there are some flashing yellow or even red lights that the economic cheerleading squad seems happy to gloss over. While in current dollars final sales to domestic purchasers popped an incredible 16.5% for the second quarter after a just-as-impressive 16.0% number for the first quarter, disposable personal income printed -26.1% for second quarter after a 63.7% number for the first quarter (still in current dollars). That's helicopter money, folks. The entries for federal non-defense spending show at -10.4% for the second quarter after a 40.8% first-quarter print. So, yes, my dear economic colleagues, demand was certainly there, as long as Joe and Jane Public (and generations of their descendants) were doing the buying, or at least subsidizing demand itself.
So, we are in great shape, as long as we acknowledge that organic economic growth is far lower than what we measure as simple economic growth. Now, we can go for a while. Be like China. Build a city, an airport, a bridge. Build them anywhere, even where nobody lives. Jobs. Spending. Just keep going. Is it real? Is it even pulled forward? Debt? Does it matter? We have our own central bank. We can make the rules fit to the situation. Deficit spending is only deficit spending if you care. Mind over matter. If you don't care, it doesn't matter. The economy will certainly slow down without another fix, and then another, and another.
The Beast That Won't Quit
Perhaps the greatest threat to third-quarter GDP and beyond is still the virus. President Biden on Thursday directed the Defense Department to examine how and when COVID-19 vaccinations could be added to the endless list of shots that are mandated for service members. The president also said federal employees and on-site contractors must either get vaccinated or mask up on the job and submit to regular testing. It may be too late already.
The Washington Post has obtained an internal document circulating at the Centers for Disease Control (CDC) stating that health officials must "acknowledge the war has changed" and that the Delta variant of this virus may be "as transmissible as chickenpox." Apparently there is much uncertainty, even at the highest levels over just how much protection vaccinated people have or for how long they shed virus once infected. About the only things that are certain are that the unvaccinated are simply playing with fire while the vaccinated still need to remain vigilant.
Do I like this rude reality? Of course not. I don't think throwing a tantrum over potentially localized masking mandates helps anyone, though.
Ever carry a mortar up a mountain in full NBC (Nuclear, Biological, Chemical) gear, including gas mask, in 100-degree heat and have to remain in that gear for days at a time while figuring out how to safely eat, drink and relieve oneself all while carrying out fire missions when required? No? Then I guess wearing a mask that really does not constrict breathing all too much at all for far less than a day isn't so bad if it means you don't kill that poor old man who you just got a can of beans off the top shelf for, does it? One message for the anti-vaxxer, anti-mask crowd: It's not about you, it's about all of us. So, toughen up, Buttercup.
On That Note...
... Apple is requiring employees and customers to wear masks in at least half of its stores. Alphabet (GOOGL) has delayed plan to return to the office. The Walt Disney Company (DIS) will require visitors to its theme parks to wear masks indoors. The state of Arkansas (not exactly a bunch of lefties) has reinstated its public health emergency and called for a special legislative session to deal with school masking mandates. There are more stories out there. Plenty more, of large corporations being more careful about bringing people back to the office and of small businesses requiring proof of vaccination of patrons.
What that means to me is that the organic economy will not hit full employment, from the perspective of both labor markets and/or production. Nor will the economy come anywhere near its potential for the velocity of money (pace of transaction) prior to a slowdown in activity both by mandate and by reduced human interaction. The re-opening story is not over, but is almost certainly going to hit the pause button. Demand, though strong, will wane without fiscal support.
I gave you Cleveland-Cliffs (CLF) recently, and it has indeed run for more than a week now. On Thursday, shares of CLF hit a seven-year high. However, it would appear the shares stalled at what must now be seen as a pivot ($24.75). Should the stock (and hopefully the materials in general) find support here (maybe on infrastructure legislation), then we'll make our target price an even $30. Failure here and I think we take a partial off at a profit and buy it back later here on Friday or on Monday after some blood comes out of the broader market.
Economics (All Times Eastern)
08:30 - Personal Income (February): Expecting -0.5% m/m, Last -2.0% m/m.
08:30 - Consumer Spending (February): Expecting 0.7% m/m, Last 0.0% m/m.
08:30 - PCE Price Index (February): Expecting 4.2% y/y, Last 3.9% y/y.
08:30 - Core PCE Price Index (February): Expecting 3.7% y/y, Last 3.4% y/y.
08:30 - Employment Cost Index (Q2): Expecting 0.9% q/q, Last 0.9% q/q.
09:45 - Chicago PMI (March): Expecting 64.2, Last 66.1.
10:00 - U of M Consumer Sentiment (July-F): Flashed 80.8.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 387.
The Fed (All Times Eastern)
09:00 - Speaker: St. Louis Fed Pres. James Bullard.
20:30 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)