Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. :)

Here is everything you need to know to get you ready for the trading week beginning August 7th, 2023.

S&P 500 and Nasdaq tumble for four straight days, notch worst weeks since March: Live updates - (Source)

The S&P 500 and Nasdaq Composite slumped Friday for a fourth straight session, and notched their worst weeks since March, as traders seemed to book profits following the latest corporate earnings releases and U.S. jobs data.

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The S&P 500 shed 0.53% to finish at 4,478.03, while the Nasdaq Composite dipped 0.36% to settle at 13,909.24. The Dow Jones Industrial Average lost 150.27 points, or 0.43%, to end at 35,065.62.

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All the major indexes reversed earlier gains during afternoon trading, and finished the week with losses. The Nasdaq and S&P dropped about 2.9% and 2.3%, respectively, to notch their worst weeks since March. The Dow edged down 1.1%.

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“People this week seem more respectful of risk than they were before,” said Steve Sosnick, chief strategist at Interactive Brokers, adding that “lots of bears have been capitulating, which is often a sign that we’re closer to the end of a rally than the beginning.”

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After being lower on the day, the Cboe Volatility Index (VIX) rose to trade above 16 — pointing to investors adding volatility protection.

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Friday marked the final day of what’s been the busiest week of second-quarter earnings season. Amazon jumped 8.3% to its highest level in nearly a year after trouncing expectations on profit and offering positive guidance. Apple lost 4.8% after reporting lower revenue than the year-ago quarter. Both tech giants reported results late Thursday.

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In a sign of the boom in travel and services demand, Booking Holdings gained 7.9% on stronger-than-expected results. Amgen popped 5.5% on solid earnings and a boosted guidance.

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Earnings reports this season for the quarter ended in June have continued to surprise some Wall Street analysts as the expected slowdown in profits proves less than feared. About 84% of S&P 500 companies have given results, with 80% surpassing Wall Street expectations, according to FactSet.

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The 10-year Treasury yield also pulled back from a multimonth high to 4.04%. Its rise in recent sessions had pressured risk assets.

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A cooler jobs report

Investors also received more clues into the state of the labor market with Friday’s payrolls report. The data showed 187,000 jobs added in July, less than the 200,000 expected by economists polled by Dow Jones. The unemployment rate also ticked lower to 3.5% from 3.6%.

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Despite the cooler headline numbers, average hourly wages pointed toward more inflation and came in ahead of expectations, rising 0.4% for the month, and 4.4% on an annualized basis. That came in slightly ahead of the 0.3% and 4.2% expected, respectively.

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Many on Wall Street had been eagerly awaiting the jobs report and its implications for the Federal Reserve’s rate-hiking cycle. About 88% of traders expect the central bank to hold rates steady at its next meeting in September, according to CME Group’s FedWatch tool.

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But next week’s consumer price report for July could make an even greater impact on rate expectations, said Wells Fargo’s Christopher Harvey.

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“A hotter-than-expected print is one of the few things that could really start to change the market’s perception of the Fed, and maybe the Fed’s perception as well,” he said. “But today’s job number, I don’t think does much of anything. I think it solidifies people’s view that the Fed is done at this point.”

This past week saw the following moves in the S&P:

(CLICK HERE FOR THE FULL S&P TREE MAP FOR THE PAST WEEK!)

S&P Sectors for this past week:

(CLICK HERE FOR THE S&P SECTORS FOR THE PAST WEEK!)

Major Indices for this past week:

(CLICK HERE FOR THE MAJOR INDICES FOR THE PAST WEEK!)

Major Futures Markets as of Friday's close:

(CLICK HERE FOR THE MAJOR FUTURES INDICES AS OF FRIDAY!)

Economic Calendar for the Week Ahead:

(CLICK HERE FOR THE FULL ECONOMIC CALENDAR FOR THE WEEK AHEAD!)

Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday's close:

(CLICK HERE FOR THE CHART!)

S&P Sectors for the Past Week:

(CLICK HERE FOR THE CHART!)

Major Indices Pullback/Correction Levels as of Friday's close:

(CLICK HERE FOR THE CHART!

Major Indices Rally Levels as of Friday's close:

(CLICK HERE FOR THE CHART!)

Most Anticipated Earnings Releases for this week:

(CLICK HERE FOR THE CHART!)

Here are the upcoming IPO's for this week:

(CLICK HERE FOR THE CHART!)

Friday's Stock Analyst Upgrades & Downgrades:

(CLICK HERE FOR THE CHART LINK #1!)

(CLICK HERE FOR THE CHART LINK #2!)

(CLICK HERE FOR THE CHART LINK #3!)

(CLICK HERE FOR THE CHART LINK #4!)

The Economy is Normalizing, and That’s a Good Thing

The economy created 187,000 jobs in July, slightly softer than the 200,000 that economists expected. The last couple of months were revised lower, and so it’s always helpful to take a 3-month average, which is now running at 218,000. That’s stronger than the pre-pandemic average of 183,000.

In short, job growth remains strong. You will hear some people heralding this as the onset of a recession, but more likely this is just normalization of the economy rather than weakness. The report aligns with what we wrote in our Mid-Year 2023 Outlook, not to mention the title: “Edging Closer to Normal”.

(CLICK HERE FOR THE CHART!)

The private sector created 172,000 jobs in July, up from 128,000 in June. On a sector level, job growth this year has been driven by non-cyclical areas like health care, education, and government. These sectors had lagged in the early recovery, accounting for just 13% of jobs created in 2021, and 25% in 2022. Over the first 7 months of this year, they’ve accounted for more than 50% of jobs created. July didn’t buck that trend, with health care seeing 100,000 jobs created. Government jobs were on the softer side, rising 15,000 in July versus an average of 53,000 between April and June.

The cyclical areas of the economy, especially construction, manufacturing, and leisure and hospitality, remain on the softer side, with job growth adding up to 34,000 across these three sectors. So far this year, these sectors have accounted for about 20% of job creation (not exactly “weak”), versus 36% in 2022 and 43% in 2021.

Again, the theme is normalization.

The Best Labor Market Since the Late 1990s

The unemployment rate fell to 3.5%, not far from 50+ year lows of 3.4%. What is amazing is that the unemployment rate is slightly below where it was in June 2023, when the Fed really started to get aggressive with rate hikes.

The unemployment rate can be impacted by people leaving the labor force (technically defined as those “not looking for work”) and an aging population. I’ve discussed in prior blogs how we can get around this by looking at the employment-population ratio for prime age workers, i.e. workers aged 25-54 years. This measures the number of people working as a percent of the civilian population. Think of it as the opposite of the unemployment rate, and because we use prime age, you also get around the demographic issue.

The good news is that the prime-age employment-population ratio remained at 80.9%. That is higher than at any point since May 2001. It was actually falling at that time, and didn’t recover until now. This is the best indication that the labor market remains very healthy, and probably in the best shape since the late 1990s.

(CLICK HERE FOR THE CHART!)

Bottom Line: All Signs Point to a Strong Economy

The US economy runs on consumption, and for that you need income. The good news is that income growth appears to remain strong and looks to be running ahead of inflation. In fact, wage growth rose 0.4% in July. Monthly numbers can be volatile, but the 3-month annualized pace is 4.9%.

You combine strong wage growth with strong employment, and that translates to strong income gains across the entire economy. Over the last 3 months, overall income growth for all workers is running at a 5.3% annual pace. Meanwhile, headline inflation is running close to 2.0%. The difference between the two tells you how fast incomes are growing after adjusting for inflation, and that’s running above a 3% annual pace over the past 3 months.

(CLICK HERE FOR THE CHART!)

In my opinion, that’s your simplest measure of underlying economic growth and should tell you things are ok. Normalization is not the same as weakness.

Sentiment Swings Higher Despite Declines

Equities have rolled over in the past week with selling hitting a pinnacle when the US government's credit rating was downgraded by Fitch on Wednesday. In spite of this, sentiment has not taken a hit. The latest survey from the AAII showed 49% of respondents reported bullish sentiment which compares to 44.9% the prior week. With nearly half of respondents reporting as optimists, bullish sentiment sits handily above its historical average of 37.5%. In fact, this week marked the ninth in a row with a bullish sentiment reading above the historical average for the longest such streak since one that ended at 13 weeks long in May 2021.

(CLICK HERE FOR THE CHART!)

The increase in bullish sentiment resulted in bearish sentiment to drop down to 21.3% which marks a 2.8 percentage point decline on the week and resulted in the lowest bearish reading since June 10, 2021 when it was 20.7%. Similar to bullish sentiment, that is the ninth week in a row with a reading below its historical average, and that is the longest streak since July 2021.

(CLICK HERE FOR THE CHART!)

As a result to the increased optimism, the bull-bear spread ticked up from 20.8 last week to 27.7. That is still below the recent high of 29.9 from two weeks ago, but reiterates how investors have an elevated degree of optimism.

(CLICK HERE FOR THE CHART!)

Not all of the gains to bulls came from bears. Neutral sentiment also declined this week falling from 31% to 29.7%. That is in the middle of the past few years' range.

(CLICK HERE FOR THE CHART!)

Small Dent to Claims

Initial jobless claims have been trending lower over the past couple of months, reaching a nearly six month low of 221K last week. This week, claims rebounded rising 6K to 227K. Albeit off the strongest readings from last fall, that remains a healthy reading on joblessness.

(CLICK HERE FOR THE CHART!)

On a non-seasonally adjusted basis, claims are at historically solid levels even if they have come off their best levels. This week, claims dropped to 205K. That is slightly above the readings from the comparable weeks of the year of the past few years (excluding 2020 and 2021 when claims were much more elevated).

At this point of the year, claims falling is normal as shown in the second chart below. The current week of the year has only seen claims rise week over week 10.7% of the time. That is the sixth most consistent week of declines of the year. Claims will continue to face seasonal tailwinds in the weeks ahead, but that will begin to reverse as summer turns to fall.

(CLICK HERE FOR THE CHART!)

Continuing claims also ticked higher in the latest week's data, reaching 1.7 million. Although higher than 1.69 million the previous week, continuing claims have much more consistently been trending lower recently, and this week's reading did in fact come in below forecasts of 1.705 million.

(CLICK HERE FOR THE CHART!)

Downgrades Overlooked

The bottom has dropped out for the major US indices today with the Nasdaq down over 2% and S&P 500 down 1.25% as of this writing. The catalyst has been the downgrade of the United States' credit rating by Fitch from AAA to AA+ . That is the first downgrade of U.S. sovereign debt in almost twelve years and just the second ever. In the charts below, we show the performance of the S&P 500, government debt, commodities, and the US dollar in the year before and the year after the 2011 downgrade.

The S&P 500 has been rallying in the months leading up to this downgrade, however, back in 2011 the S&P 500 had already begun rolling over by the time S&P downgraded US debt. In the wake of that downgrade, the S&P 500 went on to fully erase all of the prior year's gains. Fortunately, all of those losses were quickly recouped within three months of the downgrade.

As for Treasuries and other US agency debt, performance over the past few months has been the complete opposite of 2011. Of course, the interest rate environment is also completely different now with Fed Funds 500 bps higher than it was at the time of the last downgrade. That being said, in 2011, Treasury yields were on the decline in the months headed into the downgrade, but contrary to what might have been expected, the downgrade itself did not change that trend. This time around has seen yields on US government debt moving in the opposite direction.

Bloomberg's broad commodity index has been in a similar boat with the past few months seeing a decline compared to the steady uptrend back in 2011 that was uninterrupted by the downgrade.

Finally, we would note the downgrade only acted as a longer-term turning point for the dollar. As shown in the bottom right hand chart, both this year and in 2011, the trade weighted dollar was in a downtrend in the year before the downgrade. But right as S&P changed its rating, the dollar turned higher and continued to rise throughout the following year. In fact, one year out it had erased the entirety of the previous year's decline.

(CLICK HERE FOR THE CHART!)

Stocks Don’t Like August, Now What?

“Plans are worthless, but planning is everything.” President Dwight D. Eisenhower

Another month and more strong gains. Make that five months in a row, the S&P 500 finished higher. The S&P 500 is now up close to 20% on the year, just like everyone predicted.

We came into the year overweight stocks and remain there, so this run has been a lot of fun for us. But honestly, while we’ve been bullish, even we’ve been surprised by how strong markets have been.

So let’s get the bad news out of the way. The odds are increasing that stocks could finally take some type of a break. Seasonality has worked out perfectly this year. Here’s a chart we shared many, many times, and it said that some of the very best quarters out of the entire four-year Presidential cycle were the three now just behind us. Sure enough, the fourth quarter last year and the first two quarters this year were spectacular for stocks, just like history suggested. Now seasonality is saying to be open to some type of weakness, or at least a break.

(CLICK HERE FOR THE CHART!)

To be clear, we do not expect major weakness. But we believe a modest pullback of approximately 5% would be perfectly normal. The S&P 500 has closed higher for five consecutive months. And we’re now moving into the austere month of August. August has been a poor performer, ranking worse than only February and September since 1950 and trailing behind only September and December in the last ten years, although still averaging a positive return over both periods. Oh, and right behind August comes September, the weakest month seasonally. So, while the calendar was a tailwind, we believe it is now becoming a near-term headwind.

(CLICK HERE FOR THE CHART!)

Taking another look at August, when stocks are up more than 17.5% for the year heading into this month, a breather is even more likely. We found 11 previous years (since 1950), this occurred, and August was higher only three times and down 1.1% on average. So the better the year, the worse August does, apparently.

One of the reasons we were on record for a surprise summer rally was how stocks tended to do when they had a big first month of the year. When the S&P 500 gained more than 5% in January a summer rally tended to occur (check). But we take seasonal warnings as seriously as seasonal support, and now we are in a period of potential seasonal weakness, at least for the near term