July was a strong month for stocks. Can bulls keep it going? (Photo by Robert Nickelsberg/Getty ... [+]
Key Takeaways
- Stocks Staged A Big Rally In July
- More Than Halfway Through Earnings Season
- August Can Be Choppy Trading
Markets ended July on a solid note, giving investors some hope at a time when many are predicting doom and gloom. For the month, the Nasdaq was up over 12% while the S&P 500 notched a 9% gain. Overall, markets remain down on the year with the Nasdaq being the worst performer, down 21%. However, some better than expected earnings reports and forecasts may be just what was needed.
So far, 56% of S&P 500 companies have reported earnings with 75% of those companies having exceeded expectations, albeit lowered expectations. While earnings overall are on pace to grow an anemic 6% compared with last year, forward looking guidance by many companies has been less pessimistic than feared or dare I say even optimistic in some cases. We still have a lot of earnings coming, with 30% of the S&P slated to report in the next couple weeks. This week we’ll hear from companies such as Starbucks
This will also be a big week for economic data. The ISM Manufacturing Index kicks things off today with plenty of more data over the coming days, anchored by the big kahuna, Friday’s employment situation report for July. Nonfarm payrolls are expected to have increased by 250K, down from last month’s 372K but with an unemployment rate holding steady at 3.6%. One additional note with respect to employment, while it does remain the most important data point, markets have recently become very sensitive to GDP and CPI. As we get deeper into August, I’ll be watching how CPI affects the market.
As we kick off August, there are a couple things I’ll be keeping my eye on aside from earnings. Volume at the end of summer can become very light. At 22, the VIX is already forecasting a bit more chop than normal. When volume gets light, it can amplify that chop. Therefore, I won’t be surprised if we see some decent intraday swings. August also marks the annual pilgrimage to Jackson Hole for Fed officials and markets will be closely watching for signs of future Fed plans with respect to interest rates.
Speaking of interest rates, I’m diligently monitoring the yield curve. Two and ten year yields remain inverted. Inverted yield curves are often cited as an indication of a recession and given the two consecutive quarters of declining GDP, I think it’s probably safe to say we’re in a recession which would be a negative for markets.
For this week, between earnings and economic data, I think the potential for choppy trading exists. Although we’re past some of the biggest names, there are still plenty of companies yet to report that could sway markets. I’m interested to see if we can follow up Friday’s rally, which felt like actual bullish buying as opposed to short covering, with more buying. If that type of positive action continues and we see the yield curve normalize, it could mark a bullish resurgence for equities.
tastytrade, Inc. commentary for educational purposes only.
