U.S. and International Equities
Markets Finish Higher
Markets finished higher, reversing three weeks of declines for the major market indexes. Oversold conditions can be seen as the major reason for this week’s bounce as bulls in the September 7th American Association of Individual Investors (AAII) survey fell to just over 18% from 21.9%. This marks the 25th lowest reading in the survey’s history. Moreover, the percentage of bearish investors in the survey jumped from over 50% to 53.3% and reached an 11-week high.
In addition, the bull-bear spread is quite depressed at -35.2%. This is the 23rd consecutive week in the red, breaking the spread’s second-longest streak of negative readings. Inflation is on the forefront of investors’ minds as next Tuesday’s CPI report will provide market participants an indication on how much the Federal Reserve (Fed) could hike rates at this month’s FOMC meeting.
Fixed Income Mostly Lower
The Bloomberg Aggregate Bond Index finished the week lower as inflation and the Fed’s hawkish stance remains the major themes in the bond markets this year. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, performed well mirroring their equity counterparts.
Despite the hawkish rhetoric by global central bankers, credit market spreads were generally lower (prices higher). At 470 basis points (4.7%) over Treasuries, high yield credit spreads are currently in the 57th percentile since 2001 (the higher the percent ranking, the more attractive the valuation). Given the higher yields broadly in the Treasury market, the high yield index (Bloomberg Corporate High Yield) is currently yielding 8.4%, which ranks in the 86th percentile relative to history (2001).
Amid continued energy supply concerns in Europe from the Eastern European conflict, natural gas finished breakeven for the week. West Texas Intermediate crude oil plunged to a seven-month low this week as U.S. gasoline prices declined approximately 25% from their June peak. The metals mostly had a positive week as global demand concerns remain. Copper, which has declined 20% this year on f fears of a recession, could be showing improved prospects as Bloomberg reports that Chinese copper imports are higher.
Economic Weekly Roundup
The Federal Reserve released the Beige Book, which is a special report from each district. Many districts report an easing in input costs such as lumber, copper, and steel. Supply chains continue to improve, alleviating some inflationary pressures. Residential real estate market most likely has more downside as contract cancellations are rising. Import prices are easing because of a stronger dollar and falling shipping costs.
The Fed still has an inflation problem and is committed to front-loading rate hikes as aggressively as possible. The likelihood of a 75 basis point hike (0.75%) later this month could increase if next week’s inflation report surprises to the upside.
U.S. Services in Expansion
The U.S. ISM (Institute for Supply Management) Services Index rose to over 56 in August. This represents the 27th consecutive month above 50, which indicates expansion. Prices paid by purchasing managers in the services sectors have consistently fallen since April and confirms that the economy is likely past peak inflation. New orders rose the highest since December, showing a steady pipeline of future activity. We believe that the economy could reverse its recent trends and grow in the third quarter, but this growth trajectory depends on how impatient the Fed will be in its inflation fight.
Chinese export growth in August grew by 7.1% year-over-year. This represents the lowest level of growth since April. August’s results demonstrate that COVID-19 lockdowns and manufacturing disruptions are negatively impacting growth.
Weekly Employment Report
Initial claims for unemployment insurance for the latest week came in below the prior week while continuing claims increased. Labor market conditions remain tight even though there are signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Consumer Price Index (Aug), Treasury Budget (Aug)
- Wednesday: Producer Price Index (Aug)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Export/Import Prices (Aug), Retail Sales (Aug), Capacity Utilization (Aug), Industrial and Manufacturing Production (Aug), Business Inventories (Jul)
- Friday: University of Michigan Sentiment (Sep)
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on t the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
For a complete list of descriptions of the indexes and economic terms referenced in this
publication, please visit our website at lplresearch.com/definitions
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.