The August Bump or is the FOMO Road Closing Fast?

By
Samantha Subbin and Alex Harring of CNBC report the S&P 500 and Nasdaq tumble for four straight days, notch worst weeks since March:

The S&P 500 and Nasdaq Composite slumped Friday for a fourth straight session, and notched their worst weeks since March, as traders seemed to book profits following the latest corporate earnings releases and U.S. jobs data.

The S&P 500 shed 0.53% to finish at 4,478.03, while the Nasdaq Composite dipped 0.36% to settle at 13,909.24. The Dow Jones Industrial Average lost 150.27 points, or 0.43%, to end at 35,065.62.

All the major indexes reversed earlier gains during afternoon trading, and finished the week with losses. The Nasdaq and S&P dropped about 2.9% and 2.3%, respectively, to notch their worst weeks since March. The Dow edged down 1.1%.

“People this week seem more respectful of risk than they were before,” said Steve Sosnick, chief strategist at Interactive Brokers, adding that “lots of bears have been capitulating, which is often a sign that we’re closer to the end of a rally than the beginning.”

After being lower on the day, the Cboe Volatility Index (VIX) rose to trade above 16 — pointing to investors adding volatility protection.

Friday marked the final day of what’s been the busiest week of second-quarter earnings season. Amazon jumped 8.3% to its highest level in nearly a year after trouncing expectations on profit and offering positive guidance. Apple lost 4.8% after reporting lower revenue than the year-ago quarter. Both tech giants reported results late Thursday.

In a sign of the boom in travel and services demand, Booking Holdings gained 7.9% on stronger-than-expected results. Amgen popped 5.5% on solid earnings and a boosted guidance.

Earnings reports this season for the quarter ended in June have continued to surprise some Wall Street analysts as the expected slowdown in profits proves less than feared. About 84% of S&P 500 companies have given results, with 80% surpassing Wall Street expectations, according to FactSet.

The 10-year Treasury yield also pulled back from a multi-month high to 4.06%. Its rise in recent sessions had pressured risk assets.

A cooler jobs report

Investors also received more clues into the state of the labor market with Friday’s payrolls report. The data showed 187,000 jobs added in July, less than the 200,000 expected by economists polled by Dow Jones. The unemployment rate also ticked lower to 3.5% from 3.6%.

Despite the cooler headline numbers, average hourly wages pointed toward more inflation and came in ahead of expectations, rising 0.4% for the month, and 4.4% on an annualized basis. That came in slightly ahead of the 0.3% and 4.2% expected, respectively.

Many on Wall Street had been eagerly awaiting the jobs report and its implications for the Federal Reserve’s rate-hiking cycle. About 88% of traders expect the central bank to hold rates steady at its next meeting in September, according to CME Group’s FedWatch tool.

But next week’s consumer price report for July could make an even greater impact on rate expectations, said Wells Fargo’s Christopher Harvey.

“A hotter-than-expected print is one of the few things that could really start to change the market’s perception of the Fed, and maybe the Fed’s perception as well,” he said. “But today’s job number, I don’t think does much of anything. I think it solidifies people’s view that the Fed is done at this point.”

Brett LoGiurato and Hamza Shaban of Yahoo Finance also report stocks flip to losses to end rough week, Amazon surges: Stock market news today:

Stocks flipped into the red Friday afternoon after looking set to rebound earlier in the session, putting the cap on a rough first few days in August as the jobs report's release took center stage and an earnings-heavy calendar continued.

The S&P 500 finished down 0.5%, while the Dow Jones Industrial Average fell 0.4%. The tech-heavy Nasdaq Composite slipped by 0.4% after gaining as much as 1% earlier in the session.

The S&P 500 and Nasdaq were both down more than 2% to end the first week of August trading.

The July jobs report showed continued cooling in the labor market, as nonfarm payrolls rose by 187,000 last month while the unemployment rate dipped slightly to 3.5%. The numbers will serve as a key indicator for the Fed as it determines whether to halt its interest rate hiking campaign next month.

Elsewhere, Amazon (AMZN) stock was buzzing Friday, finishing more than 8% after earnings beat all around, combined with rosy guidance for the near term. Apple (AAPL), by contrast, was down almost 5% after the iPhone maker reported sluggish sales of that flagship product and a third straight quarter of declining revenue overall.

Big tech earnings wrapped. Here are the AI highlights

The major U.S. tech companies have all reported earnings this quarter, with mixed results, as the economy squeezes the wallets of consumers and interest rates remain high. The reports come at a time when excitement and hype surrounding AI has underpinned the tech industry’s recent comeback on Wall Street. Here’s how the industry’s leaders have talked about AI:

"Investments that we've made over the years in AI, including the billions of dollars we've spent on AI infrastructure, are clearly paying off across our ranking and recommendation systems and improving engagement and monetization," Meta CEO Mark Zuckerberg told investors last week.

"Our new generative AI offerings are expanding our total addressable market and winning new customers," Alphabet CEO Sundar Pichai said on the company’s earnings call last week. "We are seeing strong demand for the more than 80 models, including third-party and popular open-source in our Vertex, Search, and conversational AI platforms, with the number of customers growing more than 15x from April to June."

Microsoft (MSFT) offered a more tempered take, telling investors last week that growth from its AI services will be "gradual."

Apple also appeared to take a different tack from the more exuberant tech giants, choosing a more subtle route. When asked by an analyst during the earnings call Thursday about the company’s approach to AI, CEO Tim Cook said: "We tend to announce things as they come to market and that’s our M.O. and I’d like to stick to that."

Stocks dip into the red during final hour of trading

After trending in the positive for most of the day the major averages have lost ground heading into the final hour of trading for the week. Wall Street had advanced after a jobs report showed a cooling labor market, which many saw as further evidence of a so called soft landing for the Fed's tightening policy. But the optimism has since fizzled as uncertainty sets in.

The S&P 500 lost 0.3%, while the Dow Jones Industrial Average edged down 0.25% or 87 points. The tech-heavy Nasdaq Composite decreased 0.1%.

It was a very busy week so let me begin with this morning's US jobs report.

I follow Jason Furman as he provides a great thread every time the jobs report is released:

As Mohamed El-Erian noted, the report provided something for everyone when it comes to the 'landing' of the US economy:

 However, I agree with those who see a recession ahead:

The rise in average hourly earnings is worth monitoring because if wages take off as the economy slows, that signals stagflation ahead.

The reaction in the bond market however was telling. 

The yield on the 10-year US Treasury note fell by 13 basis to settle at 4.06%:


Now, typically when long bond yields decline, stocks rally and that was the case for most of the day today until traders dumped them in late afternoon.

When bonds rally and stocks get hit, it tells me the market is worried that a recession lies ahead.

It's still too early to tell if this is the case and next week's CPI report will also weigh on bonds (higher energy prices suggest an uptick in CPI).

Also, whenever Apple's shares fall by 5%, it weighs on the indexes.

Apple shares didn't have a good week and are now below their 50-day moving average for the first time since March:


 
Conversely, Amazon shares had a great week powered by strong AWS revenues and a strong guidance:



But I tend to trust Microsoft's subdued and cautious outlook here and its shares also fell below their 50-day moving average this week for the first time since March:

As far as overall earnings, it is true that according to FactSet, 84% of S&P 500 companies have given results, with 80% surpassing Wall Street expectations,  but those are lowered expectations.

If a recession is imminent -- and that's where I still stand -- it is hard to see companies surpassing Wall Street expectations.

As Francois Trahan of Trahan Macro Research noted in his weekly comment, perceptions of the economy have changed, leads/ lags have not and as the US economy slides into a recession, earnings will get hit hard:

Moreover, senior loan officer data is clearly showing credit tightening, and this too will weigh on the economy as the stimulus wanes and consumers become tapped out (money is running out fast):

In short, the year is far from over, and the second half of the year is shaping out to be a lot tougher than the first half.

Here is one risk sentiment ETF I'm paying close attention to:

In my humble opinion, this is going to become a stock picker's market as long as the tech sell-off isn't too brutal and the beta effect swamps all sectors.

Will the stock market crash? I don't know, all I know is a lot of FOMOers and YOLOers are going to get their head handed to them as RISK OFF markets take hold.

So, you can ignore the silly Fitch downgrade of US debt from earlier this week but I'd keep my eyes on the VIX and risk assets here:

I'd also keep my eyes peeled on high yield bonds as they're toppish here:

Just remember this, it's not about the Fed now, it's about the level of rates and the lagged effect of all those rate hikes.

When rates on long bonds cross above 4%, nasty things tend to happen, something will break.

Below, Tyler Goodspeed, former acting CEA chair and Cato Institute adjunct scholar, Jennifer Harris, former national economic council official, and Saira Malik, Nuveen CIO, join 'Squawk Box' along with CNBC's Steve Liesman and Rick Santelli to react to the July jobs report, where the U.S. economy added 187,000 jobs in July, fewer than expected, what it means for the Fed's inflation fight, and more.

Second, Mohamed El-Erian, chief economic adviser at Allianz and Bloomberg Opinion columnist, says the US economy can persevere the wage growth seen in recent monthly payrolls reports. "We can accommodate this 4% wage growth, provided productivity picks up,” he says on "Bloomberg The Open."

Third, Dan Niles, Satori Fund founder and senior portfolio manager, joins 'Squawk Box' to react to July's jobs report, earnings results from Apple and Amazon, and more.

Fourth, Tom Lee, Fundstrat, joins 'Closing Bell' to discuss the markets after big earnings, the jobs report and a looming CPI report.

Lastly, Rick Rieder, BlackRock managing director for global fixed income, doesn't see interest rates heading much higher from here. He's on "Bloomberg the Open."

Comments

Post a Comment