After stocks suffered an ugly first half of 2022, any evidence of positive momentum is welcome news. On that front, the U.S. equity indices did well, with the S&P 500 in particular moving up 2.6%. But on the other side of the equation, the gains could be a moot point if broader headwinds coalesce into a major roadblock.
Mainly, while investors should be pleased with the march higher for the business week ending July 8, they should also be aware that over the trailing month, the S&P 500 is a hair under parity. On a year-to-date basis, the benchmark index is down almost 19%, reflecting the existence of significant challenges.
If a wider theme can be materialized for the present juncture, it may well be cautious optimism. For instance, robust comparable-sales results for Costco (COST) has many on Wall Street thinking that prior doom-and-gloom scenarios were overdone. Nevertheless, Costco caters to a higher-income consumer base, which might not be reflective of the country as a whole.
Unfortunately, very few factors in the global markets suggest that investors should let their guard down. Below are the five theme to watch for the coming week.
Abe Assassination Sparks Political Stability Concerns
Toward the latter half of the prior week, the world stood in shocked silence as a lone gunman shot former Japanese Prime Minister Shinzo Abe. While a medical team quickly rushed Abe to a nearby hospital, the statesman eventually succumbed to his wounds.
As a report from The Washington Post pointed out, gun violence in Japan is incredibly rare. Further, the very few citizens that own firearms must undergo rigorous tests to confirm that they are competent and psychologically stable enough for the responsibility. These factors and the sheer senselessness of the assassination rocked the Japanese people to their core.
Moving forward, the main dynamic investors must consider is political stability. In recent years, concerns about Japan’s ability to adapt quickly to radical paradigm shifts in the Asia-Pacific zone (along with the rest of the world) began to emerge. Now that the Japanese public have realized that not even their generally safe society is immune from the turmoil often afflicting the west, required changes can possibly emerge rapidly.
But what will the post-assassination Japan look like? One of Abe’s signature proposals was to revamp Japan’s pacifist constitution to deploy a normal-functioning military. Now that the world has gotten much smaller for the Japanese, this previously unthinkable pivot could happen – creating myriad geopolitical implications.
The Gasoline Price Dilemma
While inflation is probably atop the vast majority of American households’ concerns, rising prices have not affected every sector equally. Indeed, the poster child for the post-COVID economy is the pain at the pump. Last month, data from the American Automobile Association showed that a gallon of regular unleaded gasoline hit nearly $5.02, a peak price point.
Since then, however, gas prices have consistently declined. In fact, on July 8, The Wall Street Journal reported that prices had fallen for 24 straight days. Should drivers expect this trend to continue?
Unfortunately, energy experts warn consumers not to assume sustained relief. Should the historically busy summer travel season pick up steam, prices can start surging again. Also, Russia’s invasion of Ukraine is volatile, posing grave concerns about international hydrocarbon resource flows.
But the biggest irony is that the release of oil from the U.S. Strategic Petroleum Reserve (SPR) to help ease inflationary pressures could yield far greater problems down the line. Essentially, if inclement weather events (such as hurricanes) impose more damage than anticipated, a sharply reduced SPR may generate a serious liability.
Car Repossessions Pose an Omen
Early this year, data from Morning Consult revealed that “8.4% of Generation Z, 13.7% of millennials, and 9.4% of Generation X struggled with their car payments.” With high and sustained inflation, however, it’s no surprise that data from the automotive industry reveals that car repossessions are exploding. Unfortunately, this presents a harbinger for the rest of the economy.
One of the strange developments of the new normal has been the sudden boon in personal acquisitions, whether that be single-family homes or used cars that have spiked substantially in value. For instance, a CBS News report from Nov. 14, 2019 – several weeks before the global health crisis – noted that 70% of Americans said they were struggling financially.
Curiously, this 70% then went on to buy homes, cars and invest in meme stocks and cryptocurrencies.
However, if the reports of car repos are accurate, then this narrative of sudden wealth and financial acumen may have been merely a façade. Further, if people cannot keep up with their car payments, house payments may be next.
Cryptos Back in the Spotlight
After struggling mightily this year, the cryptocurrency sector finally has something to smile about. Over the trailing seven days from the early evening of July 9, the total market capitalization of all cryptos increased about 10%. Intriguingly, this collective valuation is now about $40 billion shy of reaching the psychologically important $1 trillion threshold.
Still, investors may want to exercise caution before jumping on this trade. Referencing the above, if car repos are skyrocketing, this dynamic implies that households are hurting in other areas as well. Therefore, the current optimism in cryptos may really just be setting up a greater downfall as panicked stakeholders take what they can out of their jurisdictionally ambiguous digital assets.
Further, car repos also imply that consumers are not limiting new purchases of discretionary items. Naturally, this would filter up the corporate business chain, resulting in mass layoffs. Therefore, the fundamental risks arguably outweigh whatever technical arguments exist for cryptos in the near-to-intermediate term.
Earnings in Focus
While earnings disclosures this week are somewhat limited, there are a handful of important financial reports to consider. First up on Tuesday is Pepsico (PEP), a soft drink and snacks giant that may provide important clues about consumer behaviors. Primarily, Pepsico may benefit from the “cheap thrills” thesis as people consume sugary (and addictive) beverages as a form of stress release and escapism.
Next up on Thursday is JP Morgan Chase (JPM). The banking stalwart represents a fascinating earnings disclosure because it will provide important signals about business and investment sentiment. Should lending packages decline in volume due to higher borrowing costs, that might be one clue that a recessionary cycle is on the horizon.
Finally on the same day is Taiwan Semiconductor (TSM). With its underlying industry hit hard from the global supply chain crisis, TSM has struggled this year. However, the company is responsible for manufacturing the world’s most advanced computer chips so any news from management will be critical.
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