FTA - Fighting The Negatives

• It seems like no one wants to hear positive news just as the tide looks to be turning.
• The service side of the economy continues to hold up.
• There are more signs that inflation is starting to abate.
• Growth stocks are starting to catch a bid.
• Investors need to fight the negatives and look forward with the markets.

Don’t tell the bears, but the S&P 500 rose for a third day in a row. Oil prices edged lower after the third largest single-day drop on record the day before, while interest rate rose on stronger economic data. Investors were unphased by the release of the Fed’s minutes from last month’s meeting, which remained hawkish, because they don’t reflect the tamer growth and inflation data that has been reported since. Whether the Fed raises short-term rates by 50 or 75 basis points on July 27 will likely depend on June’s consumer price index report that comes next Wednesday. I am expecting another decline in the annual rate.

It seems like no one is interested in hearing good news these days, but we had more yesterday in the Institute for Supply Management’s service sector survey for June, which came in at 55.3. That beat expectations for 54.0 and is well above the 50 level that marks expansion. In fact, 17 out of 18 sub indexes stood above 50, indicating that the economy continues to grow. That said, we have seen weaker readings for the past three months, which is starting to result in a decline in prices paid, which is the goal of the Fed’s monetary policy. It is hard to believe we are in or on the cusp of recession with survey results like this in combination with a 3.6% unemployment rate and continued strong wage growth.

I continue to look for signs that inflation has peaked and rolled over outside of the decline in food and energy prices that is already underway. According to Zumper, we had an important one in the red-hot rental market. Rents have been one of the greatest concerns because the belief has been that price increases would continue for 12-18 months after home prices peaked, which looks to be happening now. Yet the median national rent for a 2-bedroom rell 2.9% in June, which is the largest drop we have seen since before the pandemic. This looks like another case of demand destruction from prices that were simply too high, and it should start to bring down the core rate of inflation.

It feels like we have come full circle with what is still the only sector to have a year-to-date gain getting summarily drubbed over the past month. The energy sector is still up approximately 13% for the year, but its 21% decline in June over recession fears shows there has been no place to hide during the worst first half of a year for the market since 1970.

What I find notable is that the mega-cap technology names have started to recover in recent days as growth stocks start to catch a bid. The tech sector was the tip of the spear in this bear market decline, while the energy sector was at its end. To see growth stocks in the technology sector start to perk up suggests to me that we are building a base in the S&P 500 from which investors are now searching for value. After this year’s decline value can be found in every sector of the market.

I posted the chart you see below the day after the S&P 500 marked its low for the year, which also concluded two consecutive weekly declines of 5%+ for the index. Historically, the market has produced outsized gains in the months that followed such an occurrence going back to 1970. I think history is in the process of repeating itself.

The Technical Picture

Two charts give us perspective on how deeply oversold the market has been this year. The first is the percentage of stocks on the Nasdaq Composite that trading above their 200-day moving averages. Outside of the Great Recession, it has fell to levels that coincided with bottoms over the past 20 years.

We see a similar circumstance with the percentage of stocks in the S&P 500 trading above their 50-day moving average over the past 20 years.

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