Uncomfortable is the word that comes to mind.
For the most part, equities opened higher on Wednesday, and as the day wore on, became uncomfortable with the record levels where they found themselves. There was no fire sale, well no fire across the large-caps, with an exception made for the energy sector that is (Looks like the Saudis may have blinked). Just a day-long withering of demand met by those willing to take profits.
The S&P 500, Dow Industrials, and Nasdaq 100 all closed up small, while the Nasdaq Composite closed down small. As one travels down the spectrum of market cap, the reality of this discomfort becomes more notable.
The Russell 2000 is now down not just back-to-back sessions, but six sessions in the last eight with all six of those "down" days having given up 0.9% or more. It closed on Wednesday 6.3% below its recent late June high. The index has not made a new all-time closing high since March. Of course, the withering of demand for small-to mid-cap stocks has translated to broader market weakness that has been masked by large-cap equity index performance led by the largest of caps over the past few weeks.
On Wednesday, the lack of strength in breadth was once again quite visible. Of the 11 sectors comprising the S&P 500, defensive sectors took the top three spots on the daily performance tables, with Technology coming in fourth. Only four sector select SPDR ETFs finished in the green, and Tech ( (XLK) ) was indeed supported itself by hardware, which largely means Apple (AAPL) with a little HP Inc (HPQ) sprinkled in.
The rest of tech was not so hot as the Dow Jones U.S. Software Index gained 0.04% and the Philadelphia Semiconductor Index surrendered 0.35%. The bottom four sectors for the day are all considered cyclicals, led south by the already mentioned Energy sector ( (XLE) ) as crude oil spit the bit, and the Financials ( (XLF) ) as the yield curve flattened in response to Fed Chair Jerome Powell's appearance before the House Financials Services Committee.
Taking anything positive away from Wednesday's trading volumes would probably be speculative, as volumes increased and at the headline level, it appeared that the indices did not really move. That volume was mostly negative though. Losers beat winners at the Nasdaq quite decisively at more than 2 to 1, and down at the NYSE by an odd-looking 11 to 8. Declining volume easily bested advancing volume at both of New York's primary exchanges and the performance gap exacerbated as the day wore on.
Understanding Powell
I think I see where Jerome Powell is coming from. I tried to express what I see as his point of view in my Wednesday morning piece ahead of part one of his two days of testimony before those currently passing as legislators.
What are the planet's central bankers to do when the economy as is currently measured hits peak growth, perhaps hits peak inflation, while still running at peak monetary accommodation, but still has a long way to go to get anywhere near peak levels for one of the Fed's two mandates... that of "maximum sustainable employment?" All while one would think the economy is currently at peak fiscal stimulus as well, but we know that those already mentioned legislators still have much bigger ideas.
The Chair understands that only he and his crew can fund whatever it is that those legislators will do. If they had to go to market with the size of the borrowing intended, the actual free market, the costs would be prohibitive. So, the Chair, this Chair, must choose to prioritize the labor market over price stability as he waits. Waits for the federal government to allow the stipend to weekly jobless benefits to expire, so a real feel for labor market supply can be determined, and waits to see what actually comes out of both houses in the way of increased deficit spending on infrastructure as well as on social programs.
On Inflation
On inflation, after acknowledging that what we see has probably been a bit hotter than expected, Powell said "It is still the same story. It is still the same parts of the economy that are producing this inflation. It is a pretty narrow group of things that are producing these high readings, but we are anxious like everybody else to see that inflation pass through." Readers know that I happen to agree with this assessment, as we went through this ahead of Powell's appearance in Wednesday's Market Recon.
There is certainly going to be some structural support for higher prices built into the economy, such as higher wages (see the Blackrock (BLK) news?). That said, many of the components of the CPI showing the most aggressive upward price acceleration are also the most easily identifiable as truly transitory in nature.
Semiconductors will not be short supply forever, and more crude oil is coming on line. We know these things. Oh, by the way, on that last note, I halved my exposure to both Exxon Mobil (XOM) and BP PLC (BP) early on Wednesday morning. Those shares may be added back on as energy sector performance erodes. I have not made that call yet.
Powell sent on to say... "We really do believe and virtually all forecasters do believe that these things will come down of their own accord as the economy reopens - it would be a mistake to act prematurely." My opinion, as anyone who reads me knows, has not wavered. I agree that pulling out of what I would call normal monetary accommodation (such as interest-rate targeting and funding the federal government at artificial price levels) might be a mistake, I strongly disagree with this Fed on their intent to continue supporting the market for mortgage-backed securities. This only benefits current homeowners, not housing markets. Barring young families from entry into these markets could not have been the central bank's intent, but that has clearly been the result.
The Fed could now and should already have completely halted their monthly purchases of MBS ($40 billion per month), and this could probably be done without harming the broader economy (beyond real estate, which is bloated) in any significant way. If this is somehow beyond the FOMC's depth, when it comes to my country, I am here to help.
Now This
As most of you have read by now, the Senate Budget Committee has come up with a plan to spend $3.5 trillion on social and other economic programs in addition to the $579 billion bipartisan infrastructure plan that made headlines after negotiations between the Biden administration and Senate Republicans on putting together a larger infrastructure deal broke down. President Biden has already endorsed the $579 billion plan, though has not openly supported this much larger plan as of yet, though there does seem to be a heightened level of enthusiasm around the idea from the left.
In theory, the expense would be funded through tax hikes on corporations and "wealthy" Americans, savings on health care and reduced drug prices, carbon tariffs and good old economic growth. Never mind that increasing taxes on corporations kills both employment and economic growth. We'll just pretend that companies hire more people as margins flatten.
The unveiling of the plan, which is not yet really highly detailed, would be why the dollar paused on Wednesday. This plan also reinforces West Virginia Senator Joe Manchin as the most powerful elected official in the nation. Manchin, for those that have slept through most of this year, is a Democrat, but also a fiscal conservative. While Republicans worry about the budget when Democrats are in power, and Democrats worry about the budget when Republicans are in power, Manchin just worries about the budget without putting on a political front.
The Dems will need a united front for this plan to have a chance through reconciliation, assuming a united stance by Republicans. That means that the progressives will have to accept that the plan is not even larger, the moderates will have to accept how large this plan is, and Manchin will have to be convinced that the plan is properly funded. In other words, this plan is a long way from getting done. For now.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 359K, Last 373K.
08:30 - Continuing Claims (Weekly): Last 3.339M.
08:30 - Philadelphia Fed Manufacturing Index (July): Expecting 28.2, Last 30.7.
08:30 - Empire State Manufacturing Index (July): Expecting 18.7, Last 17.4.
08:30 - Import Prices (June): Expecting 1.2% m/m, Last 1.1% m/m.
08:30 - Export Prices (June): Expecting 1.2% m/m, Last 2.2% m/m.
09:15 - Industrial Production (June): Expecting 0.7% m/m, Last 0.8% m/m.
09:15 - Capacity Utilization (June): Expecting 75.6%, Last 75.2%.
10:30 - Natural Gas Inventories (Weekly): Last +16B cf.
The Fed (All Times Eastern)
09:30 - Speaker: Federal Reserve Chair Jerome Powell.
11:00 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BK) (1.00), (SCHW) (0.76), (CTAS) (2.31), (MS) (1.64), (PGR) (1.04), (TSM) (5.25), (TFC) (1.17), (USB) (1.12), U (NH) (4.45)
After the Close: (AA) (1.28), (WAL) (2.01)
(MS and AAPL are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
