Following earlier optimism regarding a bullish recovery in the second half of this year, the latest downturn in the equities market presented a sharp reality check. On Friday, the benchmark S&P 500 found itself down nearly 3.4%, while the tech-centric Nasdaq Composite declined by almost 4%. For the year, the S&P index is in negative territory to the tune of 15.4%, whereas the Nasdaq currently swims in bear market territory, down over 23%.
Weighing on market sentiment is of course the latest comments from Federal Reserve chair Jerome Powell. Worrying about the long-term implications stemming from multidecade highs in inflation, Powell essentially signaled an aggressive environment for interest rate hikes. Naturally, that wasn’t the news investors were hoping for, particularly sending growth-focused public firms down into a pre-weekend abyss. Further, Powell’s comments had strong implications for other speculative assets along with the broader economy.
Put another way, investors need to consider revamping their portfolios to reflect new paradigms. Here are the themes to watch for the upcoming week.
Powell Brings the Pain
During Powell’s annual policy speech in Jackson Hole, Wyoming, the main focus centered on inflation. Though the consumer price index dipped slightly in July over June, the wider picture still presents one of struggles for millions of American households to make ends meet. However, to address this expanded inflation level requires additional near-term challenges.
So far, Powell indicated that the Federal Reserve would do what is necessary to tackle rising prices. “These are the unfortunate costs of reducing inflation,” Powell remarked during the economic symposium, per the Associated Press. “But a failure to restore price stability would mean far greater pain.”
According to the AP, “Investors had been hoping for a signal from Powell that the Fed might soon moderate its rate increases later this year if inflation were to show further signs of easing. But the Fed chair indicated that that time may not be near, and stocks tumbled in response.”
Needless to say, the Fed must navigate a delicate tight rope. Despite the broader implications of the most recent July jobs report, the technology sector has suffered from accelerated layoffs this year. Therefore, too much aggressiveness with monetary tightening could yield unexpected consequences.
Energy Prices May Rise Again
Early this month, The Wall Street Journal reported that U.S. gasoline prices had fallen for seven straight weeks and were approaching an average price of $4 a gallon. While that provided some much-needed relief for drivers, investors shouldn’t take this price deflation for granted.
“Whether gas prices keep moving lower depends on several factors. Potential hurricanes around the Gulf of Mexico could force refineries offline, and unanticipated disruptions from the Russia-Ukraine conflict could both drive gas prices up again, analysts said.”
Global signs exist that people should prepare for pessimistic outcomes rather than the opposite trajectory. “A cost-of-living crisis in Britain is about to get worse, with millions of people paying about 80% more a year on their household energy bills starting in October,” according to the AP.
One of the most pressing catalysts for higher energy prices is instability in eastern Europe. “Russia’s war in Ukraine created a full-on energy crisis as Moscow reduced or cut off natural gas flows to European countries that rely on the fuel to power industry, generate electricity and heat and cool homes.”
Unfortunately, a reduction in global hydrocarbon energy supplies tends to filter down to higher prices for everyone, including Americans. Therefore, now is not the time to get too comfortable.
Time to Check the WFH Attitude
Earlier this year, I presented a case for why the work-from-home (WFH) phenomenon may be coming to an end. In part, data from the American Management Association (AMA) revealed that prior to the COVID-19 pandemic, people physically on their employers’ clock admitted to wasting an average of 2.09 hours a day. Over the course of a year, that lost productivity scales up to billions of dollars wasted.
Now, recessionary pressures may force individual worker bees to rethink the cost-benefit profile of potentially sticking out unfavorably amid rising layoffs in exchange for the possibility of continuing to telecommute.
According to The Atlantic, real-estate billionaire Stephen Ross articulated the dilemma that workers face. “Employers have been somewhat hesitant [of implementing return-to-office policies] because they didn’t want to lose their employees,” Ross told Bloomberg. “But I think as you go into a recession and people fear that they might not have a job, that will bring people back to the office. You have to do what it takes to keep your job and to earn a living.”
It's possible that the power dynamics have now shifted back over to the employers’ side. Therefore, insisting on WFH privileges may backfire spectacularly.
Cryptos Present a Credibility Problem
On Aug. 14, Barchart readers were warned that while the cryptocurrency sector enjoyed buoyant trading due to major blockchain projects exploring and implementing energy-efficient consensus mechanisms (i.e. proof of stake), the development could be a classic 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.” The only problem now is that many investors who bought heavily into well-known fundamental catalysts are now likely suffering losses.
Over the trailing week from the time of this writing (early Sunday morning), the total market capitalization of all cryptos slipped 5.6%. Even worse from a psychological perspective, cryptos have lost their hold on the $1 trillion market cap level. It now points to a credibility problem.
Several crypto advocates billed the virtual currency sector as a market that can run independently of fiat-based frameworks such as the equities market. However, Fed chair Jerome Powell’s announcement clearly and negatively affected sentiment. Therefore, digital assets might not be as independent as its supporters believe.
Earnings in Focus
While the meat of the second-quarter earnings season may have passed, several intriguing disclosures will be made in the upcoming week. First off, most eyes will likely be on Best Buy (BBY) on Tuesday when it discloses its financial performance ahead of the opening bell. With discretionary retailers downgrading their guidance, it will be interesting to see how Best Buy responds. While many of its products are discretionary, they’re also vital to participation in the digital economy.
On the same day, investors may choose to focus on Chewy (CHWY), an e-commerce firm specializing in pet food and related products. As the American Pet Products Association revealed, the broader pet industry represents a viable growth market. However, this vast framework hasn’t always translated to individual competitor success. Therefore, Chewy isn’t guaranteed a solid result.
Finally, on Wednesday, discount retailer Five Below (FIVE) will disclose its quarterly report. Covering analysts expect the company to deliver earnings of 79 cents a share. In addition, Five Below cynically benefits from economic pressures as more consumers become price sensitive amid rising layoffs.
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