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Does the Fed get it? — Week of July 25, 2022

Earnings holding up, but for how long?

Strategy and Positioning written by Steve Orr, Chief Investment Officer; and Essential Economics written by Mark Frears, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index 2.56 -16.18 -7.97 11.46 11.84 3,961.63
Dow Jones Industrial Average 2.00 -11.24 -6.60 7.52 10.52 31,899.29
Russell 2000 Small Cap 3.59 -18.98 -16.90 6.42 6.02 1,806.88
NASDAQ Composite 3.33 -24.03 -18.81 13.76 14.20 11,834.11
MSCI Europe, Australasia & Far East 4.43 -16.94 -14.71 2.56 2.87 1,897.38
MSCI Emerging Markets 3.01 -18.05 -23.04 0.50 1.32 990.37
Barclays U.S. Aggregate Bond Index 1.17 -8.74 -9.57 -0.33 1.10 2,149.25
Merrill Lynch Intermediate Municipal 0.20 -6.16 -6.58 0.25 1.59 300.40

As of market close July 22, 2022. Returns in percent.

 Strategy & Positioning

 — Steve Orr 


Not bad

Three out of five days higher last week was a welcome break for stocks. Overall earnings reports are not bad, coming in about as expected. The S&P 500’s 2%+ gain was its best week in the last four. Defensive sectors did better on the down days; the up days were signs of life for tech stocks. Lost in the daily noise is the fact that since the June 16 low, the NASDAQ is higher by 11% and S&P 500 8%. Higher lows and higher highs are a welcome break from the -8% body blows we took in April and May.

Last Tuesday’s 2% rally pushed both the NASDAQ and S&P 500 above their 50-day moving averages. Averaging the last 50 days of closing prices gives one a good idea of the short-term direction. Both indices spent 60 days below their 50-day average, a rare occurrence. In 10 cases identified by Bespoke Research, a 2% rally to end the 60-day run usually sets the stage for good returns six and 12 months later. We would like to not wait that long. There are a few other technical indicators that are either flat or bottoming. In particular small and mid-cap indices’ relative strength have steadily improved since mid-June.

Not fun

Over on the fundamental side, the clouds are getting darker and closer. Recall a few weeks ago that we pegged odds of an early 2023 recession above 50%. We would raise that to 70% and move those odds into 2022. Enough “fast” survey data is coming in to flip our short-term economic outlook negative.

Global economic activity continues to grind lower. Purchasing Manager indices for the Euro Zone showed contraction in June for the first time in a year. Business activity in the U.S. remains in expansion, but the rate of expansion fell last month for the first time in two years. The Conference Board’s Leading Indicators fell -0.8% in June, its largest drop since April 2020. According to our friends at Bespoke Research, since 1960 every streak of four monthly declines occurred either during or just before a recession. Hmmm.

Weekly jobless claims bottomed in early April at 166,000, their lowest in forty years. Claims have marched higher each week since then. At roughly 240,000, they remain at very low levels, but we are mindful that claims always rise into a recession.

Too late

Market technicals may be bottoming, but fundamentals are clearly edging lower. Business sentiment and outlook are already at the bottom of the Gulf of Mexico. They are not going up anytime soon because one Bull stands in their way: the Fed. Despite the slowdown, evidence the Fed has persisted this last month in offering cheery outlooks on the economy and concern over inflation. The Fed appears determined to raise interest rates far enough to destroy demand and raise unemployment by who knows how much.

Businesses on the economy’s front line have a dour outlook because their order books are already shrinking, inflation is raising their costs and short-term interest rates that are headed higher. The question for this Wednesday’s Fed press statement is whether the Fed “gets it.” Will they acknowledge that the world is slowing down, and their rate increases are driving the dollar and expenses higher? The European Central Bank raised rates one-half of a percent last week, coming late to the inflation party just like the Fed. At least they mentioned business activity is slowing.

Our view is that both banks were too late in starting to raise interest rates. Inflation of some raw materials has peaked and as demand is destroyed by higher rates, more will follow in the coming weeks. Markets may not always get the timing exactly right, but they have a good track record of calling direction. Over the last month, longer term interest rates have stopped rising, signaling that future growth may be muted. Neither bank may admit they are too late, but they can state reality and prepare to slow or stop their rate increases.

Tech week

According to Refinitiv data, 75% of the 106 S&P 500 companies reporting have beaten expectations — well below the 81% beat rate over the last four quarters. Earnings for the 106 to-date are down -6.9% from 2021’s second quarter. Financials, particularly the big banks, get most of the blame. As a group, their earnings are down -26% from year-ago levels. Take away the Financials, and earnings are running at a +12% y-o-y rate. Not bad at all.

Snap was the big tech downer last week, falling over 60% after it announced weak online ad revenue. While Snap has a relatively modest market share in online advertising, Meta (nee Facebook) and Google are the giants. Google reports after the market close on Tuesday and Meta Wednesday. Zacks Research pegs tech sector earnings for the second quarter at -9% year-over-year on 3% higher revenues. Several of the biggest names in the sector have announced layoffs and/or hiring freezes. 

The balance of the week is tech-heavy for the S&P 500. Microsoft, Intel, Qualcomm and Etsy will give traders a good read on hardware, software and eyeballs on screens. Industrial heavyweights General Electric, GE, Northrup, Chevron and Exxon round out the week. A total of 162 S&P constituents report.


The slowdown toward recession is here. We think the chances for the Fed to avoid a recession are small. This Wednesday they need to reassure traders and investors that the economy does matter, and that inflation will come down with only one or two more rate increases. The economy grew in the second quarter, but just like the first quarter, headline GDP will be negative thanks to accounting methods. Another month of patience…

 Essential Economics

 — Mark Frears


  Upcoming Economic Releases: Period Expected Previous

Dallas Fed Manufacturing Activity

Jul -22.0 -17.7
26-Jul FHFA House Price Index MoM May 1.5% 1.6%
26-Jul S&P Corelogic US City Prices MoM May 1.50% 1.77%
26-Jul Conference Board Consumer Confidence Jul 96.9 98.7
26-Jul Conference Board Present Situation Jul N/A 147.1
26-Jul Conference Board Expectations Jul N/A 66.4
26-Jul New Home Sales Jun 661,000 696,000
26-Jul New Home Sales MoM Jun -5.0% 10.7%
27-Jul Durable Goods Orders Jun -0.3%  0.8%
27-Jul Durable Goods ex Transportation Jun 0.2% 0.7%
27-Jul Cap Goods Orders Nondefense Ex Aircraft Jun 0.2% 0.6%
27-Jul Pending Home Sales MoM  Jun -1.0% 0.7%
27-Jul FOMC Rate Decision (Lower Bound) 1p CDT 2.25% 1.50%
27-Jul FOMC Rate Decision (Upper Bound) 1p CDT 2.50% 1.75%
28-Jul GDP Annualized QoQ Q2 0.5% -1.6%
28-Jul Personal Consumption Q2 1.2% 1.8%
28-Jul GDP Price Index Q2 7.9% 8.2%
28-Jul Initial Jobless Claims 23-Jul 250,000 251,000
28-Jul Continuing Claims 16-Jul 1,380,000 1,384,000
29-Jul Employment Cost Index Q2 1.2% 1.4%
29-Jul Personal Income Jun 0.5% 0.5%
29-Jul Personal Spending Jun 0.9% 0.2%
29-Jul Real Personal Spending Jun 0.0% -0.4%
29-Jul PCE Deflator YoY Jun 6.7% 6.3%
29-Jul PCE Core Deflator YoY Jun 4.7% 4.7%
29-Jul UM (Go MSU) Consumer Sentiment Jul 51.1 51.1
29-Jul UM (Go MSU) Current Conditions Jul N/A 57.1
29-Jul UM (Go MSU) Expectations Jul N/A 47.3
29-Jul UM (Go MSU) 1-yr inflation Jul 5.2% 5.2%
29-Jul UM (Go MSU) 5- to 10-yr inflation Jul 2.8% 2.8%

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here

Mark Frears is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas – Dallas.

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