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Cooling Inflation and Strong Start to Q2 Earnings Season Helps Equities Claw Back
Equity markets roared back last week amid encouraging inflation data and strong bank earnings. Global equities (represented by the MSCI All Country World Index) were up 3.40%, and domestic stocks (represented by the S&P 500 Index) were up 2.44%.
Consumer Price Index
The Consumer Price Index (CPI) report released for June showed the disinflationary trend continuing and at a quicker pace than consensus expectations. Headline CPI rose at an annual pace of 3.0%, the lowest level in over two years. Core CPI (excluding food and energy) also slowed to an annual rate of 4.8% which was the slowest pace since October 2021 but still above the Fed’s target of 2% inflation. Housing prices continued to be the largest contributor to the core CPI gain, but the monthly rise in rents was the lowest since 2021. Thursday’s release of the Producer Price Index (PPI) continued the optimistic news as headline PPI rose only 0.1% on an annual basis and core PPI up 2.4%.
Big Bank Earnings
Big banks kicked off earnings season as companies such as JPMorgan Chase, Wells Fargo, and Citigroup released Q2 results. All three banks posted higher-than-expected revenue, and JPMorgan Chase and Wells Fargo also beat EPS estimates. Even with a strong start to earnings season, analysts are still forecasting an average earnings decline for S&P 500 companies of -7.1% according to FactSet.
CBOE Volatility Index
The University of Michigan’s index of consumer sentiment rose higher than expectations and to the highest level since September 2021. Slowing inflation and stability within the labor market helped propel sentiment upward. The CBOE Volatility Index (VIX), a measure of short-term market volatility, dropped over 10% last week near a 3-year low. The VIX generally traded above a value of 20 for 2022 and spiked to 36.45 in March of that year but has since settled to around 13.50.
The economic calendar this week includes US retail sales as well as housing market data such as the National Association of Home Builder’s Housing Market Index and housing starts for June. Retail sales rose for both the months of April and May despite ongoing inflationary pressures on consumers. Investors will continue to monitor earnings releases as names such as Tesla, Netflix, Bank of America, and American Airlines are slated to report results.
I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.