Rough 1st Half of the Year To Say the Least
It was nice to get a little reprieve from the incessant selling of the last few weeks before the long July 4th weekend. No need for there to be a meltdown into our nation’s birthday. The markets rose nicely last Friday to start the 3rd quarter after the S&P 500 closed out its worst first-half performance in decades. The S&P 500 rose 1.1% to 3,825.33, the Nasdaq Composite was up by 0.9% to 11,127.85, and the DJIA increased 321.83 points, or 1.1%, to 31,097.26. The Russell 2000 advanced almost 1.2%.
Volume shrank on both main exchanges, so we did not get a volume confirmation on the moves. All 11 S&P sectors were in the green with utilities, real estate, and consumer discretionary outperforming. It’s amazing to see the Nasdaq produce a gain on the day even as semiconductor shares sold off. Despite Friday’s gains, all the major averages posted their fourth down week in five. The S&P 500 lost 2.2% on the week, the Nasdaq finished lower by 4.1%, and the Dow fell 1.3% for the week. Stocks also initially lost their footing after the Institute for Supply Management’s closely watched manufacturing index fell in June to a two-year low of 53%. Economists polled by The Wall Street Journal had forecast a fall to 54.3%, from 56.1% in May. A reading above 50% still indicates an expansion in activity, directionally, the manufacturing surveys are clearly now slowing. Our real problem here is that S&P 500 earnings estimates of 10% year-over-year growth are too high even in a mild economic slowdown. Weakness to date has been entirely multiple contraction (the price in price/earnings ratio), and that further declines will be driven by how much earnings drop. Guidance during Q2 and Q3 earnings season will dictate the depth of this selloff, but the market cannot sustain a new favorable market until inflation and inflation expectations are trending in the right direction. We think with commodity prices pulling back that we will see inflation start to moderate and move lower over the next three to six months.
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