Bottom Lines Are Just Fine

MARKETS

The Bottom Line Is the Bottom Line

Earnings growth looks good.

Equity futures opened slightly positive on Sunday evening at 6:00 p.m. ET, the S&P 500 and the Dow as well as the Nasdaq and the Russell 2000.

US Treasury futures opened slightly negative, from the two-year note all the way up to the 30-year bond.

It looks like follow through from Friday: Stocks up, bonds down. There’s a little more to it though.

Small-caps lagged on Friday, for example. And the two-year note is acting a little differently than the five-, 10-, and 30-year Treasuries.

Our friend Michael Coolbaugh has been ahead of the price action and sees a potential opportunity.

Michael, the founder and chief investment officer of Strom Capital Management, talks about the divergence in the two-year in an August 6 episode of The StockPick Interview.

Michael also addresses a factor we’re going to have to get used to: volatility.

Seventy-eight percent of the S&P 500 have reported expectations-beating earnings during the current reporting period.

Price action this week will once again turn – and probably a lot – on incoming inflation data, with a growth twist.

The Producer Price Index will get things started on Tuesday at 8:30 a.m. ET ahead of the Consumer Price Index at the same time on Wednesday.

And then we’ll have another episode of weekly jobless claims, still enjoying a star turn with employment front of mind right now.

Retail sales on Thursday will offer additional insight into the health of the US consumer.

Should be an exciting few days as investors, traders, and speculators digest the numbers and what they mean for the Federal Reserve and future monetary policy.

It’s almost enough to make you forget about another pretty, pretty good earnings season.

Through Friday, 91 percent of the companies in the S&P 500 $SPX had reported results for the three months ended June 30.

It’s fair to say, as John Butters did in his regular earnings update for FactSet, that performance relative to expectations “continues to be mixed.”

The good news is the percentage of companies reporting positive surprises is above average. The bad news is the magnitude of those surprises is below average.

With 91 percent of companies reporting, earnings for the the S&P 500 have grown by the most since the fourth quarter of 2021.

Seventy-eight percent have reported earnings per share above estimates; the five-year average is 77 percent, the 10-year average 74 percent.

Companies are beating estimates by an average of 3.5 percent, below the five-year average of 8.6 percent and the 10-year average of 6.8 percent.

Here’s something else that seems to matter: So far we’ve seen the highest year-over-year earnings growth rate since the fourth quarter of 2021.

Home Depot $HD will report second-quarter numbers on Tuesday morning, Cisco Systems $CSCO will report fiscal third quarter results on Wednesday, and Walmart $WMT will report second quarter numbers on Thursday.

And then the next significant earnings event will be Nvidia’s $NVDA announcement of its fiscal 2025 second quarter results on August 28.

We’ll hear from four Federal Reserve Bank presidents this week: Atlanta’s Raphael Bostic on Tuesday, St. Louis’s Alberto Musalem and Philadelphia’s Patrick Harker on Thursday, and Chicago’s Austan Goolsbee on Friday.

We’ll see how their words work with the incoming data.

DEEP DIVE

Trump Talks Monetary Policy

He’d like to lend his instinct to the process.

Donald J. Trump can do it all.

He’s his own spokesman, his own negotiator, his own lawyer. Given a chance, he’d run monetary policy too.

That would be spectacular.

Federal funds futures traders are pricing in a rate cut in September.

There is a basic consensus that the Fed has room to move off its inflation-fighting stance given recent deterioration in the employment market.

Some are saying the Fed, like it was with inflation, is already too late with employment.

And now we have the Donald weighing in at a desperate moment for his personal political fortunes.

Donald Trump said during a news conference on Thursday, August 8, 2024, that he should have input on Federal Reserve interest rate policy.

The Federal Reserve was always going to face extra-special scrutiny with critical decisions arising during the quadrennial US presidential election season.

That the greatest showman/self-promoter in recent American political history is involved both raises and denigrates the stakes.

Trump nominated current Federal Reserve Chair Jerome Powell in November 2017. Now he says he wouldn’t reappoint him should he win reelection this November.

The former president also said – given his demonstrated business acumen, including multiple bankruptcies – that he should have a role in Fed decisions on interest rates.

The multimillionaire said his instincts are superior to those of members of the Federal Reserve Board and the chairman too.

Thus, according to The Wall Street Journal, a Trump restoration would result in far-reaching changes at the Fed.

Perhaps the most significant would be a requirement that the Fed run any interest rate and regulatory decisions by Trump’s White House.

THE STOCKPICK INTERVIEW

How To Position for Falling Rates

”I think the whole inflation scare is largely behind us.”

They won’t get the same sort of attention PPI, CPI, and retail sales will this week.

But Michael Coolbaugh, the founder and chief investment officer of Strom Capital Management, will be watching housing starts and building permits.

“I believe that the economy is slowing far more drastically than most people out there expect,” Coolbaugh explained in an August 6 StockPick Interview.

Of course Coolbaugh noted softening employment data. He also highlighted another couple of critical data points.

“I think the most telling signs of stress are coming from the residential real estate market,” Coolbaugh said. “We can see how there's been a significant drop off in building permits as well as new units under construction.”

Those are early indicators of a slowing economy, according to Coolbaugh. “If you track those closely, you can follow how the labor portion from the construction industry follows shortly thereafter.”

The US Census Bureau will release housing starts and building permits data at 8:30 a.m. ET on Friday.

That’s Coolbaugh’s short-term forecast. And even then he’s not saying we’re headed for recession.

“What I do believe is any slowdown will not be too severe. And the reason for that is that the Federal Reserve does, of course, have a significant amount of ammo to combat that slowdown.”

Jerome Powell mentioned the Fed’s ammo at his most recent press conference. And Coolbaugh sees little risk if our central bankers choose to deploy it.

“I think that the whole inflation scare is largely behind us.”

The S&P 500 lost approximately 6 percent during the first three trading days of August, while the US Treasury market gained about 2 percent.

In this kind of environment, with expectations of lower interest rates priced in but concerns about growth dominant right now, Coolbaugh is bullish on three assets.

“I've been positioning myself for more of a fall in interest rates with a preference for the short end of the interest rate curve,” Coolbaugh explained.

He sees opportunity right now in the two-year US Treasury.

“I do believe the Federal Reserve will be cutting interest rates far more aggressively than the market expects right now,” Coolbaugh explained. “So I think interest rates, especially at the short end of the curve, will fall significantly.

“I will be looking to buy dips on the two-year Treasury yield.”

Coolbaugh also noted how remarkable it is that gold held up as well as it did during an aggressive rate-tightening cycle. And now we’re on the verge of an aggressive loosening cycle.

He also highlighted bullion buying by global central banks including the Peoples Bank of China.

The combination “will definitely help to bolster the prospects for gold and gold miners as well.”

Another beneficiary of easing monetary policy will be the entire real estate complex.

“The areas that have been punished the most with the tightening cycle have really been the real estate market,” Coolbaugh noted.

“Now that inflation is largely behind us and we have a slow economy,” he said, “I do think there's a lot of relief that will come to the real estate market purely on the basis of as rates fall, real estate value should rise.”