There is a lull in the trading action this morning. Whether it lasts remains to be seen, yet there isn’t a great deal of conviction in the equity futures trade at the moment despite a round of mostly better-than-expected earnings news from leading financial firms, Goldman Sachs lowering its probability of a recession in the U.S. over the next 12 months to 20% from 25%, and the June Retail Sales Report still meshing with a soft landing outlook for the economy.
Currently, the S&P 500 futures are down seven points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 34 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 41 points and are trading 0.1% below fair value.
This is not a “bad” indication. Rather, it seems to reflect a view that the cash market has already made a big run, bolstered by a belief that the economy will achieve a soft landing without a big jump in unemployment, that the Fed is close to being done raising rates, and that earnings growth will return in the second half of the year.
In other words, a lot of good news has been priced into stocks since the S&P 500 flirted with 4,100 in late May. Yesterday, the S&P 500 hit a 52-week high at 4,532.85 before closing at 4,522.79. The latter marks an approximately 10% gain since the lows in late May.
That may help explain why better-than-expected results from Bank of America (BAC), Morgan Stanley (MS), Charles Schwab (SCHW), Lockheed-Martin (LMT), and Prologis (PLD) have failed to move the needle for the broader market in pre-market trading.
The same can be said for the June Retail Sales Report, which was better than the headlines might suggest.
Total retail sales in June increased a weaker-than-expected 0.2% month-over-month (Briefing.com consensus 0.5%), yet May sales were revised up to 0.5% (from 0.3%). Excluding autos, June retail sales also increased a weaker-than-expected 0.2% (Briefing.com consensus 0.3%) following an upwardly revised 0.3% increase (from 0.1%) in May. After accounting for the upward revisions to May sales, the June results were roughly consistent with expectations.
The key takeaway from the report is that control group sales, which are used in the computation for personal spending in the GDP report, were up a solid 0.6%, leaving them far afield of an economy in recessionary distress.
The Treasury market experienced some knee-jerk volatility immediately after the release but has settled back to levels it was trading at just before the Retail Sales Report was published. The 2-yr note yield is down two basis points to 4.70% and the 10-yr note yield is down four basis points to 3.76%.
Lower market rates should be thought of as generally supportive for the equity market, but, here again, that hasn’t provided an incentive yet to whet the appetite of buyers. If rates drop further, it might change things, but for the time being, the stock market is settling into a digestive mode.
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Originally Posted July 18, 2023 – Digesting some big gains
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