Politics, Earnings, and Key Inflation Data Dominate Headlines

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning, everyone. This is Quincy Krosby. It's the Talking Point. It's Monday morning, July 22, and as I record this, the futures market is poised for a positive open. Last night when the futures market opened, this was Sunday night, 6:00 PM Eastern time, the futures market was in the green. The market has no feelings. We have to always keep that in mind. And number of people worried that there, you know, the political instability coming from President Biden dropping out of the race would upend the market. The market obviously doesn't see it that way. However, and I want to point this out, it could, it could, if this all deteriorates into basically not having a candidate and a team, presidential and vice president, going into the convention, because then if it goes into the convention without anyone you know, named, and I do want to point out that there are those in the Democratic party, just say, you know what?

Quincy Krosby:

We don't want to anoint anyone. We don't want voters to think we came in and just anointed Kamala Harris. We need to have an open process. So we have to keep that in mind. But right now, the market sees this based on what we're seeing and says, okay, we'll just get through it. And basically also looking at Kamala Harris's record and the potential who the vice presidential candidate could be. But as I said we'll watch the news all week. The market certainly will, but the market also has many other things to think about. And that is what happened last week. What was going on? The volatility index, the VIX, climbed higher, but it went up to 16. That isn't that dramatic. It was a washout. We have that every so often where the market, basically, everything sells off. I want to add here, and this may sound really odd, but I do want to point this out.

Quincy Krosby:

There are many who say, look, when everything is going down, not just one sector, but everything going down, and I should point out the only thing that basically was positive territory was actually gold was doing really well, right? We saw that, but in terms of the equity market, when everything is moving down it's seen as actually healthier than just having one sector or two sectors or one index going down and everything else and climbing higher. I won't get into why that's the case, but most likely it is. You know what, there are times we do have this kind of washout, it's kind of get out and when it becomes even more fierce, and we've had days like that, years ago, I mean, just, just get out it, we always say it is get out and ask questions later. That's not what we had.

Quincy Krosby:

It wasn't that dramatic. It felt like that because we've had so many up days. So again, the market is trying to assess the earnings season. It's trying to assess bilateral relations with China and how far are these tariffs going to go under a Democratic administration or with President Trump's desire to slap even more tariffs on Chinese imports. Not to mention the whole issue of the chip sector, and we won't get into that now, but we saw what upended the market last week. It had to do with the Biden administration suggesting that there was a rule that they may impose. This rule has to do with products that are in chip technology, semiconductor technology, particularly. It could be any technology, but that's what it's really focused on now. And if any other product manufactured in another country has even a minute piece of technology that is American made in America, that they may, that company may have to come in and ask for a license, a license to sell.

Quincy Krosby:

And again, especially to China. And we're basically talking about the semiconductor industry. So you had that, and then you also had on the Republican side, President Trump talking about Taiwan and saying that, you know, the Taiwanese basically took the semiconductor industry. So all of that combined basically just went in there and brought the mega names down. It was a warning to the market that perhaps under either administration, it's just going to get much tougher for these companies. Now, in addition to that, the small caps, which had been surging in the market, I want to go over that if I may, because the market does remember, yes, these are algorithms that represent 40 to 50 to 60% of daily market volume. They have a tremendous amount of history embedded in those algorithms. And back in 2016, small caps surged on a Trump victory. Why? Because the idea behind it was that he was going to bring business back to the U.S., deglobalization, and that the small caps, because he talked about wanting American companies to do well, and they are obviously primarily American companies, that they would do better.

Quincy Krosby:

However, I do want to point out with this surge that we've seen with the smaller caps, it had really much to do with the fact that many of those companies have debt and that debt is not, you know, it's a floating rate debt. In other words, they go to the bank, they borrow money, and the rates are high. But the point here is that the minute the market really believes that we are going to get a rate cut September 18, we saw small caps gain and they need those rate cuts. They are rate sensitive, and the sense of the market is we will have rate cuts. But I want to point something else out, the small caps are also very much a gauge on economic conditions. In other words, if they felt that the economy is slowing, to the point that their businesses are going to be hurt because the economy is going to slow, you would see small caps sell off.

Quincy Krosby:

They are a barometer of economic growth as they are also a barometer of potential interest rate cuts. So all of the indices just basically just pulled back and came down. They moved too far, too fast. And this week we're going to see whether or not they can gain any momentum. And reason is one earnings. We have to get back to the fact that the market is in the earnings season. And this week we'll have about 300 companies that come from the small cap space with their earnings. We want to hear what they have to say and especially their guidance, especially their guidance. And the market, is going to pay very close attention finally, to small caps. Also, I want to repeat something I said last week, and that is the small caps and mid-caps are more volatile in terms of risk profile than the S&P 500.

Quincy Krosby:

Please keep that in mind. They have a more risky, more volatile profile. This week is a busy week for the market, as we all know, and this week we're going to have Tesla. And remember, Tesla is consumer discretionary. So we have to remember where Tesla fits in to the sectors. And we're also going to have, at the same time, we will have Alphabet, Google, and it is important to listen to what they have to say. Next week will we really get the good portion of the big mega tech names, not including NVIDIA, that comes at the end of the earnings season, as we all know, but we want to hear what they have to say about absorbing AI. And again, is it easy for them? And the market really is looking for, are these, can these companies ultimately, ultimately monetize the expense that they're, you know, budgeting for AI?

Quincy Krosby:

Can they monetize it? In other words, can they sell it and is it going to be more attractive to get subscriptions or consumers buying into it and other companies buying into it? So this is going to be important when we hear from Google. Also, this week we're going to hear from Coca-Cola, and I'm mentioning this because we heard from PepsiCo last week, and PepsiCo had numbers that were good, but in the U.S. they made it very clear that we, the consumer in the U.S., is holding back, we're being much more careful. And they had price hike after price hike. And I can remember when we talked about their earnings, we were buying anyway, it didn't matter. We were going in and we were buying what they had at a higher price. Well, the earnings that they came out with showed Uhuh. We weren't, we were being much more careful.

Quincy Krosby:

So we'll see what Coca-Cola has to say. We're also going to hear from Visa this week. And I always want to pay attention to Visa. I want to pay attention to American Express. American Express reported last week. Why do we want to know? We want to know are consumers paying their bills? And the ones who are delinquent, the ones who are late with payments, we want to know is it just the lowest wage earner or has it moved up the scale. American Express did well, but they were a little bit cautious. And remember they cater to higher income and business spending. So it wasn't that clear what they were saying, it was kind of a cloud over it, but they made it very clear that it was getting a little bit more difficult compared with previous earnings seasons. This week, also, we're going to have a host of defense names.

Quincy Krosby:

And why this is important is the expectations are that under a Republican administration defense spending would climb higher. So this week we want to pay attention to Lockheed Martin, General Dynamics, Northrop Grumman. They all have defense contracts. We want to see how they're doing. And I think the market has been questioning. I thought defense spending, if the market could talk, defense spending was going to go up. It has climbed higher, but not, not as much as we thought. But again, expectations are, doesn't mean it come to fruition, that under Republican administration we would see higher defense spending. And then also this week, I want to point out that we have a host of reports coming from the housing market and we want to see what that shows about the sales in housing and whether or not Americans continue to spend on housing with the rates remaining high.

Quincy Krosby:

Also this week we have no Fed speakers, and that's pretty darn good, finally. But I do want to point out that last week, and I think this also got the market kind of investors scratching their collective head, the head of the San Francisco Fed, Mary Daley, who does vote this year in the Federal Open Market Committee, when the Fed meets, she made a comment and said, yes, you know, inflation is coming down, but yeah, we're not quite there yet. And you know, that did not sit well because even Chairman Powell, in some of the talks that he's given has said inflation is coming down. And he's the one that basically pointed to a September 18 rate cut. He didn't say that he was cautious that every meeting is live, they're data dependent, but the market felt a little bit more dovish tone to when he spoke last during this you know, period where the Fed speaks, they're in the blackout period right now.

Quincy Krosby:

But Mary Daley, she's influential and that last comment that she had had the market a little bit nervous. Right now too, in addition to all the things the market has been nervous about, we are also going to have durable goods. This is important because we did see industrial production up a little bit, which is exactly what the market wants to see last week and also last week, let me point this out. The Philadelphia manufacturing survey, which I always say comes from the Fed, we had a very weak Empire Fed survey, which was New York manufacturing, but the Philadelphia survey was higher than expectations. And the reason this is important is they have a more direct positive correlation with the American heartland where the manufacturing belt. So we'll see if that continues as we go through the next number of weeks. But I wanted to point that out because manufacturing, as you know, has been a contraction for so many months.

Quincy Krosby:

Also, this week we're going to have last but absolutely not least, is the Personal Consumption Expenditures price index. That is the PCE. It is the Fed's preferred reading on inflation. Expectations are that the headline year over year will come down from 2.6 to 2.5. The market wants to see it edging lower, that would offer confidence that the Fed will in fact cut rates. It's extremely important and again, the consensus estimates are that the PCE will not disappoint, that it will absolutely show that inflation is working its way down to the 2% target that the Fed has. Now, Chairman Powell made it very clear in his last conversation, with in an interview, that the Fed's not waiting until they get to 2%. He even said that would be too late, that would be way too late. We want to make sure that the trajectory of disinflation remains intact, and that's what we're seeing.

Quincy Krosby:

So keep this in mind and it should, if it comes out the way that the consensus estimates suggest, coming in lower, it should be good, again for small cap names, we'll see if that holds. The other thing I do want to point out overall is that the market is very much focused, very much focused on initial unemployment claims and also continuing claims. The initial unemployment claims ticking higher, but they're not in the category yet where, oh my goodness, this just is flashing a danger for the labor market. However, I do want to point out that the continuing claims is worrisome. It's being monitored by the market and certainly monitored by the Fed. And the reason is that Chairman Powell has made it clear that if they see deterioration in the labor market, they will come in and they will cut rates. This would have to do with the Fed's maximum employment mandate as opposed to price stability, which has to do with inflation.

Quincy Krosby:

The market would much prefer the Fed to cut rates because inflation is coming down, not because the market is looking at a deterioration in the labor market. So this is important. This has become very important on Thursday mornings when those numbers come out. So a very busy week for the market. There's political fluid situation in the political environment, but also in terms of earnings and always about the guidance. And then most important, I would have to say this week is what we have in terms of a picture of inflation. Have a very good week. We'll be back next week. Thank you so much.

Speaker 2:

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Speaker 2:

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