Richard DruryVolatility soared on Monday morning of last week, as a confluence of events sent stock prices cascading at the open, with the S&P 500 plunging more than 3%. Investors were concerned about the implications of a weaker-than-expected jobs report for July, Warren Buffett’s Berkshire Hathaway reported that it has sold half its Apple stake during the second quarter, and the yen carry trade unwind hit full tilt all at the same time. I wrote that morning that fear should hit its peak during the week, and in retrospect it certainly looks like that happened, as investors bought that dip each day that followed, with the best two-day gain of the year coming on Thursday and Friday to close the index unchanged. Edward JonesThe service sector continues to fuel the economic expansion, as we learned from the Institute for Supply Management’s Purchasing Managers Index (PMI) for July. It strengthened from June, moving back into expansion territory to join a similar index produced by S&P Global. This eased concerns that July’s jobs report was a harbinger of a recession. Further easing those concerns was a plunge in initial unemployment claims on Thursday. It turns out that last month’s labor market was adversely impacted by Hurricane Beryl, and we are likely to see a snap back in the numbers for August. I think the incoming economic data in the days and weeks ahead will help investors realize that concerns about recession are for naught right now, and that the pullback or correction, depending on the market index, is a buying opportunity. The drawdown in the major market averages is likely behind us. BloombergThe focus should shift from economic growth back to inflation this week, with reports on producer prices (PPI) and consumer prices (CPI) for July. The consensus expects the headline and core Consumer Price Index increases to be 0.2%, which should only serve to reinforce the disinflationary trend and affirm for Fed officials that it is time to begin easing monetary policy in September. BloombergWith 91% of the constituents in the S&P 500 having reported earnings for the second quarter, the year-over-year growth rate in earnings stands at 10.8%, which is above the 8.9% expected at the end of the quarter. If the economy was on the cusp of a meaningful downturn, we would most definitely be hearing about it from corporate management teams during earnings conference calls, but analysts are not reducing estimates in a meaningful way. If fact, the 1.8% decline in estimates for the current quarter since it started is the exact average we have seen over the past 5- and 10-year periods. This is very encouraging for the bulls. FactSetEven more encouraging is that earnings for the S&P 500 index, excluding the Magnificent 7 technology stocks, are on pace to deliver growth in the second quarter for the first time since the fourth quarter of 2022. This positive rate of change was discounted by the market in the improvement in breadth we started to see several weeks ago, as more stocks contribute to the bull market gains beyond the technology sector. That broadening in outperformance should continue through the end of this year, building a stronger foundation to the bull run. Bloomberg We may see more volatility in the days ahead, as bears attempt to sway investor sentiment by wrangling over how each economic report is either inflationary or recessionary, but they are likely to be failed attempts to breathe life into a narrative that has fallen flat for nearly two years now. If you forecast a recession or an end to the bull market, you will eventually be right, as both are natural stages of each economic and market cycle. If you are early by a year or more, then you are not doing anyone any favors, including yourself.Lots of services offer investment ideas, but few offer a comprehensive top-down investment strategy that helps you tactically shift your asset allocation between offense and defense. That is how The Portfolio Architect compliments other services that focus on the bottom-ups security analysis of REITs, CEFs, ETFs, dividend-paying stocks and other securities.
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