After charging higher to cut its year-to-date loss in half, the benchmark S&P 500 began to show some cracks. Last Friday, the index declined by 1.3%, contributing to an overall loss last week of nearly 1.2%. For the technology-centric Nasdaq Composite, it lost 2% on Friday while shedding 2.7% for the week. Though none of these dips represent a cause for alarm in and of themselves, they contrast with prior momentum.
Further, the red ink may impose psychological blows that could hamper the bulls’ effort to regain control of the market. Much of the negativity stems from recent comments that St. Louis Federal Reserve President James Bullard made. Per a CNBC report, Bullard indicated that the central bank has no intention of slowing interest rate hikes in the near future. Therefore, the equities sector could suffer deflationary effects prior to supportive frameworks.
As well, speculative arenas such as cryptocurrencies and meme stocks suffered conspicuous injuries. With the Fed seemingly fully committed with its aggressive monetary policy, it may take some time before purely growth-oriented market ideas resume their monumental rallies which occurred with surprising frequency last year.
Along with yet more brewing geopolitical tensions, the upcoming week may bring plenty of fireworks. Here are the five themes to watch.
Housing Enters a Recession
According to The Wall Street Journal, U.S. existing home sales fell in July for the sixth straight month, representing the longest streak of declines in more than eight years. Per the news outlet, higher mortgage rates and a shortage of homes for sale – particularly in the starter home price range – have cooled demand.
“The drop-off is the latest sign that the formerly booming housing market is stalling out. Home-building is also drying up, and mortgage applications are falling as more buyers keep to the sidelines.”
Perhaps worst of all, Lawrence Yun, chief economist for the National Association of Realtors, stated what many had suspected for a long time since the Fed launched its monetary tightening initiative. “We are in a housing recession.”
One factor that has imposed substantial disruptions to the normal cycle of the housing sector is affordability. According to Yun, buyers entering the real estate market now typically pay 25% of their income on mortgage payments, up from 15% before the pandemic.
This dynamic aligns with independent analysis that demonstrates that in major metropolitan areas, people could be spending up to 40% or more of their income on core living expenses.
The Oracle of Occidental
On Friday, Warren Buffett generated headlines across the business media spectrum when his conglomerate Berkshire Hathaway (BRB.B) received regulatory approval to purchase up to 50% of Occidental Petroleum (OXY).
According to a CNBC report, on July 11, “Berkshire filed an application with the Federal Energy Regulatory Commission to buy more of the oil company’s common stock in secondary market transactions. The conglomerate argued that a maximum 50% stake wouldn’t hurt competition or diminish regulatory authority.”
Carlos Clay, acting director of division of electric power regulation, granted the permission on the basis that such authorization was “consistent with the public interest.”
The news is significant since the Associated Press reported on Aug. 9 that Berkshire bought more than $11 billion worth of OXY stock. At the time, this investment gave the conglomerate more than 20% control of the oil producer. As well, the AP noted that “Wall Street follows Buffett's actions closely, including his investments in Occidental Petroleum. Its shares have more than doubled in price this year.”
Moving forward, investors may consider adding hydrocarbon-related assets to their portfolios, especially with energy supply chain security becoming a red-hot topic.
Geopolitics Rears Its Ugly Head
On a somewhat related note, CNN reported that shelling intensified around Ukraine’s Zaporizhzhia nuclear power plant, Europe's largest, which has been under Russian control since March. Naturally, the main concern is that military actions may lead to an accident, creating devastation that could permanently alter the European landscape.
To be clear, CNN stated the following. “Nuclear experts are keen to defuse some of the more alarmist warnings, explaining that the main threat is closest to the plant itself and doesn't justify Europe-wide alerts. Experts are particularly wary of any comparisons to the Chernobyl disaster, a repeat of which is incredibly unlikely, they said.”
Nevertheless, the broader concern from a geopolitical standpoint is that the Kremlin could deploy whatever desperate means necessary to force European allies into acquiescence. Such a framework also has powerful implications for energy supplies. Unfortunately, the region is significantly dependent on Russia hydrocarbon supplies, meaning that Moscow maintains some control of the steering wheel.
However, since the U.S. and Europe can’t afford to lose credibility on this matter, it wouldn’t be surprising to see greater involvement – such as escalated aid packages – bolster the broader Ukrainian resistance.
Speculation Might Not Pay
Recently, one of the main talking points in the cryptocurrency sector focused on the pivot by certain blockchain networks from the energy-intensive proof of work to the more efficient proof of stake. At the same time, Barchart.com readers were warned last week about the risk of wagering too heavily on obvious upside catalysts.
“While intriguing, the development could be an example of buy the rumor, sell the news. In other words, if everyone bets on the same horse, the subsequent reward may be very limited.” It turns out, age-old wisdom struck again.
At the time of this writing, over the trailing seven-day period, the total market capitalization of the crypto sector suffered a near-14% loss. Undoubtedly, much of the volatility had to do with fundamental headwinds impacting the global equities sector. Nevertheless, the red ink in digital assets provides a warning: when a market thesis appears too obvious, it might not work out the way everyone hopes.
The same could be said about the recent resurgence of meme stocks. For instance, while Bed Bath & Beyond (BBBY) enjoyed a blistering resurgence, it suffered a shocking 40.5% loss on Friday. That brought its performance last week to a loss of over 26%.
Earnings in Focus
On Monday, many analysts will undoubtedly take time to assess the quarterly earnings performance of Zoom Video Communications (ZM). Once a pandemic favorite because it enabled the broader work-from-home pivot, Zoom has lost considerable relevance now that society is normalizing. Still, management may provide clues about the wider trajectory of companies recalling their employees.
On Tuesday, Wall Street will zero in on Toll Brothers (TOL), a popular homebuilder. Up until late 2021, investors bought into the housing euphoria narrative. This year, sentiment has gone sour, with TOL stock down nearly 33% on a year-to-date basis. Therefore, analysts will want to know how the company intends to navigate the storm.
Finally, most people will arguably be curious about the quarterly results for Dollar Tree (DLTR). Should sales rise for the discount retailer, it could entail broader pain for the consumer economy as discretionary spending dries up.
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