The Weekend Edition # 102

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week! 

Here’s what we cover:

• Market Recap - Confused market

• Macro - No party in September

• Earnings Recap - Retail Earnings Takeaways

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - 21 Aug - 25 Aug, 2023 📉📈

We finally had the first green week in 3 weeks, albeit this was not the most pleasant week. We saw extreme choppiness during the week brought on by big events - NVDA earnings and Jackson Hole.

While NVidia gapped up on earnings, it turned around and gave up most of its gains the following day as we saw the S&500 decline -1.35% on Thursday, in one of the worst days it’s had this year.

The general view was the market pricing in a hawkish J. Powell at Jackson Hole and Friday brought a relief rally post the event.

Market Breadth continues to remain largely flat and hasn’t really taken a direction as yet. Sentiment still remains largely bearish and

And while the market remains somewhat confused, the IPO market is heating up again. We had announcements from 3 companies looking to list in September and expecting to raise over $10 billion each.

Commodities

Energy prices continue to remain choppy with pessimism in China, lower industrial production in developed markets but tighter supply conditions.

Iron Ore saw a major rally this week (+7.91%). Since mid-August, the base metal has rallied almost +12%, which is significant even if it’s nowhere close to it’s highs from earlier in the year.

There are reports that Chine steelmakers are ramping up production ahead of any potential output cuts during policy meetings net week. On the other hand, traders are likely trying to front-run a bigger rally, on news of potential stimulus measures that may benefit the property market.

The Week Ahead 

Next week is likely to remain choppy with as the US heads into Labor Day weekend and we have a long list of macro data coming out. We have PCE Data, Jobs Data and the second estimate for the US GDP. While GDP estimates were not a big deal earlier, we’ve seen upward revisions that could create some intraday price drama.

The week after Jackson Hole is usually quiet with rates remaining largely flat. With lower liquidity before the holiday weekend and the market in negative gamma, we might however, continue to choppy to downside price action next week.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - No party in September

Historically, September is the worst month for US Stocks. There’s no chasing these clouds away!

Yardeni Research has a great chart as shown below that calculated that the average decline for the S&P 500 in September has been 1.1% since 1928. On average the Index has been down -4.7% and up +3.9%.

We also have a few more notable events that could likely mean turbulent markets:

• We have the quarterly options expiration and for the last 3 years we have not had a great result. We’ve seen the market decline further upon these events.

• This year we will have further Treasury issuances. Our understanding is that it will be about $1 trillion. This will add pressure to bank reserves and of course liquidity. We’re coming up to the end of the US fiscal year as well which means these issuances may have to be accelerated.  

• We usually have higher buybacks in September that helps balance out the market but this year despite authorizations, we’ve seen the levels fall overall. Buybacks are expected to fall -17%.1

Earnings Season

FactSet Summary

• 98% of the S&P500 has reported earnings thus far. The blended earnings decline stands at -4.15% (previous week: -4.59%). The actual earnings decline stands at -4.32% (previous week: -5.55%).

• 56.24% of the companies reporting had a negative price impact on releasing earnings results.

• So, we’re at the end of earnings season and we made out better than expected. Going into earnings season, the forecast was for a -7% decline in earnings.

Takeaways from Retail Earnings 

We had a mixed set of earnings from the retailers this week but, most of the news was not pleasant. The SPDR S&P Retail ETF XRT was down -4.4% on the week.

We saw significant declines from Foot Locker (-31.9%) and Dick’s Sporting Goods (-23.8%).

Some of the themes coming out retail earnings over the last two weeks:

• Inventory management has improved and companies are reporting lower inventory growth compared to the spikes we say 2 - 3 quarters ago.

• Expenses are under control as freight and labor costs normalize.

• Theft also called Shrinkage has become a major issue. Dick’s Sporting Goods, Nordstrom reported a drastic increase in shoplifting. Ulta discussed a 50% improvement in numbers after they locked their perfume display cabinets.

• Companies are reporting stable demand but see customers trading down. Customers are either buying non-brand items or lower ticket sizes. Lowe’s discussed lower ticket sizes.

• Late payment (delinquencies) are increasing, according to Macy’s.

• Finally, the resumption of Student Loan Repayments was on everyone’s minds. Almost every retailer talked about the negative impact that the upcoming repayments will have on demand this year.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts

The market rallied post Jackson Hole, quite likely because there was some relief. Although, Fed Chair Powell came on saying that the message hasn’t changed from last year which means they are still concerned about inflation.

From what we saw last month, key items like housing and services still remain sticky. And now we’re seeing food and energy costs also creep up.

Of course there has been progress but, they are tracking the same data as we are and he spoke to the decline in inflation not being sustainable. The truth is, with GDP growing at this pace plus the tight labor market – inflation may very well come back.

So I think the message was still leaning hawkish even if it was delivered in a calm manner.

On the plus side, he didn’t hint at the neutral rate being higher - something I had flagged on Friday’s Breakfast Bites. So the 2% target rate for inflation stays firmly in place. He also didn’t talk about delaying rate cuts. So far, our view is that rates may be cut mid-2024 but at slow pace until inflation reaches that 2% target in late 2024.

Here’s wishing you safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.