(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).

Last Tuesday, the stock market gapped down as banks reported earnings which disappointed in terms of their outlook. The CPI report also came in higher than expected at 5.4% which was higher than expectations and marked another multi-year high.

Stocks put together an AM rally to new highs but these gains were quickly reversed with the index closing slightly lower.

On Wednesday, stocks gapped higher on soothing comments from FOMC Chair Powell in his Congressional testimony. Powell essentially made clear that the Fed is nowhere close to hiking rates, and he continues to view the rise in inflation as transitory.

Adding to the bullish mood, many companies reported strong earnings results above expectations and there was another drop in unemployment claims. Despite the positive news, stocks couldn’t hold onto their gains and ended the day slightly lower.

Thursday saw a weak open as investors were focused on bank earnings showing that interest income was negatively affected by the flattening of the yield curve, and loan demand wasn’t showing signs of materially picking up.

Both developments are consistent with a decelerating economy. Stocks leaked lower for most of the day before an end-of-day rally to end with a small loss.

Friday was a barnburner with the market gapping up following a better than expected retail sales report. There was concern over spikes in coronavirus case counts due to the Delta variant leading to restrictions and lockdowns in parts of the world.

Adding to these woes was poor consumer sentiment data which came in at the lowest level since February. It ended a 3-week winning streak for stocks, and the Dow finished the day down by more than 500.

Friday’s selling snowballed into Monday as the S&P 500 opened down more than 1% and was down as much as 2% intraday before a late-day rally led to it closing down 1.5%. Fear was the prevailing mood as Treasuries were the only major asset that had a bid.

The Vix ended the day up more than 20% and hit intraday highs last seen in mid-May when the S&P 500 was 6% lower.

Market Outlook

The next major catalyst for the stock market will be earnings season, and we are just getting into the thick of it. This week will feature reports from Intel and IBM, while next week will bring reports from tech giants like Apple, Amazon, and Facebook.

Although, only a handful of major companies have reported so far. Earnings season is following the same general script as last quarter. Reports are strong especially in terms of beating earnings expectations but it’s by a slimmer margin. Additionally, we are seeing some stocks sell-off despite a strong report.

Last week we noted that earnings from banks would give some insight into the economy. These figures came in strong at the top and bottom-line, but there was some concern on the impact of the compression between long and short-term bonds which makes traditional banking less profitable.

Additionally, loan demand has failed to pick up which undercuts the narrative of a self-sustaining economic rebound. However, some analysts pushed back and said that loan demand was likely weak due to consumers and companies being flush with cash.

We also discussed the importance of Fed Chair Powell’s testimony to Congress and that it would help clarify the Fed’s last statement. As expected, Powell pushed back on notions that the Fed was too hawkish by emphasizing that he believed inflation was ‘transitory’ and there was further to go before the Fed could pull back the reins.

 What To Do Next?

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $431.74 per share on Tuesday afternoon, up $6.77 (+1.59%). Year-to-date, SPY has gained 16.23%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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