On paper, neither the bulls nor the bears had much to celebrate, with the S&P 500 closing slightly down last Friday but gaining half a percent over the trailing five days. It was a similar circumstance with the Dow Jones, which ended a hair above parity for last week, while the Nasdaq clearly won out, gaining a bit over 2% for the past five days.
However, the weakness for the business week ended Aug. 5 partially clouded market optimism. Over the trailing month, the benchmark S&P 500 gained 6%, mitigating its year-to-date loss to nearly 14%. Several weeks ago, the index shed more than 20%, an unofficial barometer signifying a bearish cycle. However, with equities now appearing to fade, many investors are turning to the Federal Reserve to see what lies next.
Unfortunately, the Fed is in a tight spot. Though recent economic indicators suggest that the U.S. is not in a recession, it’s the threat of one that actually justifies a dovish central bank policy. Without the apparent need for monetary juice – quite the opposite matter if strictly looking at the data – the Fed doesn’t have the rules of engagement necessary to directly help the stock market.
It’s going to be an interesting few days. Here are five themes to watch.
Reading Between the Lines of the Jobs Report
As the AP put it, the employment figures that the U.S. Bureau of Labor Statistics delivered was a “stunner.” It’s difficult to suggest otherwise. “Despite raging inflation and anxiety about a possible recession, employers created 528,000 jobs last month , more than double market expectations. That's the fastest pace of hiring since February.”
Ironically, though, the circumstance is not what the Fed wanted to hear. Per another report from the Associated Press, the “blistering data suggests the economy may not be in a recession, as feared. But it also undercuts investors’ speculation that a slowing economy may mean a peak for inflation soon. That means the Federal Reserve may not let up on its aggressive rate hikes to combat inflation as early as hoped. And much of Wall Street still revolves around expectations for rates.”
However, it’s also important to point out possible issues related to the quality (or predictability) of the latest jobs report. For instance, though the leisure and hospitality segment added 96,000 jobs, rising inflation and employment cuts in high-paying opportunities could hurt the sector in the long run.
Revenge Travel Loses Its Luster
As a natural segue, investors ought to focus on the health of the broader travel industry. The concept of revenge travel – or the pent-up demand among consumers for vacations and other experience-based services following two years of COVID-19 mitigation protocols – has accelerated sales for the segment. Logically, the demand surge pressured the entire infrastructure, with labor shortages affecting efficiencies.
Now, the simultaneously embattled and resurgent industry faces another problem: Mother Nature. Per an AP report published on Aug. 5, “Tens of thousands of flyers had their travel plans upended Friday after airlines canceled about 1,400 U.S. flights as thunderstorms hit the East Coast.” As well, another “6,300 flights had been delayed by early evening, according to tracking service FlightAware.”
The AP mentioned that it was the second straight day of major disruptions and the worst day for cancellations since mid-June.
Interestingly, despite July’s lift for leisure and hospitality jobs, the employment situation in this segment “is below its February 2020 level by 1.2 million, or 7.1 percent,” per government data. Therefore, inefficiencies in this space could increase, meaning that investors need to monitor their travel stocks carefully.
Simmering Geopolitical Tensions
Last week, tensions between the U.S. and China escalated dramatically as government officials hinted at the likelihood of House Speaker Nancy Pelosi visiting Taiwan, an extremely contentious issue for Beijing, which views the breakaway island as part of Chinese territory. Sure enough, Pelosi did touch down in Taiwan, setting off an intense response from China.
According to a CNN report, China launched military drills near Taiwan and flew drones close to Japan last Friday, skyrocketing tensions in the strait following Taipei welcoming Speaker Pelosi for the historic visit. In response, Taiwan’s defense ministry labeled the Chinese People's Liberation Army (PLA) crossing the median line -- the halfway point between the island and mainland China – as a “highly provocative act.”
Amid this worrying flashpoint, investors must also recognize the brewing global food crisis. Though grain shipments are leaving Ukraine’s Black Sea port of Odesa, the scale is still extremely small compared to pre-conflict norms.
According to Jonathan Haines, senior analyst at data and analytics firm Gro Intelligence, “This 26,000 tons in the scale of the 20 million tons that are locked up is nothing, absolutely nothing ... but if we start seeing this, every shipment that goes is going to increase confidence.”
Millennials in Crisis
If you found yourself confused about the state of the economy for millennials, you’re not alone. Prior to the COVID-19 crisis, the Fed suggested that this age cohort is poorer than prior generations. But during the new normal, millennials represented the largest homebuying demographic of any generation. Today, millennials face a debt crisis unrelated to their supposed acquisitiveness in real estate.
According to information cited by The Hill, “More than 70 percent of millennials have some form of non-mortgage debt, with the average millennial owing $117,000.” That’s a staggeringly high figure, suggesting that much of the optimism broadcasted about this age cohort throughout the new normal – such as the meme-stock phenomenon – was largely illusory.
Such risky exposure to unproductive debt – especially during a period of rising borrowing costs – may impose another threat to economic viability. While millennial debt likely won’t sink the country tomorrow, it’s well worth it for investors to keep this matter on their radar.
Earnings in Focus
Though it’s impossible to catalogue every significant earnings disclosure in the coming week, there are a few that should interest investors for their broader economic implications. First up on Monday is Blink Charging (BLNK). Specializing in the rollout of electric vehicle charging infrastructure, management may provide important clues about the wider transition to the electrification of mobility.
Next up is Cronos Group (CRON), which focuses on the legal cannabis market. Recently, the “botanical” industry has garnered positive sentiment, with Tilray (TLRY) in particular posting surprisingly robust sales results. Therefore, analysts will be hoping that Cronos can keep the positive momentum alive.
Finally, entertainment giant Disney (DIS) is bound to draw much scrutiny from Wall Street’s biggest players. Featuring a compelling mix of physical and digital entertainment platforms, Disney is tied to the resilience of the consumer economy. Therefore, its forward guidance will be incredibly important.
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