It was a mixed day on Wall Street. The S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) closed lower despite a cooler-than-expected June Consumer Price Index report. The Dow Jones Industrial Average (^DJI) eked out a 32-point gain.
On Asking for a Trend, Morgan Stanley Chief Global Economist Seth Carpenter explains how the June inflation data bolsters his case for three rate cuts from the Federal Reserve this year, while longtime Wall Street strategist Ed Yardeni gives the reasons behind his decision to raise his year-end S&P 500 forecast to 5,800.
Anchors Julie Hyman and Josh Lipton also discussed a couple of big analyst calls on Darden Restaurants (DRI) and Costco (COST).
For more expert insight and the latest market action, click here
This post was written by Stephanie Mikulich.
Video Transcript
There’s the closing bell on Wall Street and now it’s market domination over time.
We’re joined by Jared B to get up to speed on the action from today’s session.
Let’s start with the major averages and where they ended today.
And as we’ve been talking about, there has been a big rotation over the course of the session today driven by a drop in interest rates that was in turn triggered by a more benign CP I report consumer price index this morning, then had been anticipated the dow kind of moving sideways for a lot of the day here up 32 points by the end of the session up only about 1/10 of 1%.
But the S and P saw a pretty substantial drop here of 9/10 of 1% and the NASDAQ was off by 2% as we saw a rotation out of large cap technology and into more interest rate sensitive areas of the market.
And also the sort of much awaited broadening is happening at least today with the S and P equal weight up while the S and P is down and the Russell 2000 gaining quite a bit 3.7%.
As I said, a lot of it having to do with what’s going on with yields here today.
Big pull back in yields of nine basis points to 4.19% on the 10 year Jared.
Great stuff there.
Julia love the dichotomy about the sector rotation we’re seeing right now.
I think if you were a portfolio manager and you had uh a little bit too much mega cap going into the day, you were able to rotate and get some small caps and some cyclical stuff there.
So uh nice summary.
Just want to go over some of the sectors we saw real estate really pop after that report.
But utilities is number two up there, both of those very interest rate sensitive.
So that big decline in bond yield to the lowest that we’ve seen in the tenure in a couple of months that is front and center in this.
And then you take a look at the three under performing sectors here.
Tech communication services, consumer discretionary.
What are those?
Those are the mega cap growth sectors, a lot of tech in there.
NASDAQ 100 looks terrible today.
But then you compare it to the dow and it’s looking a little bit more palatable, at least the right side of your screen there where you don’t have those big tech names.
Also noting that JP Morgan, not a tech name, financial name in the red ahead of its earnings tomorrow.
Also want to check out our leaders.
And here we saw home builders actually in the poll position that they are up 6% XHB right there.
Uh This is a sector that rose to prominence with mega caps in 2023 then fell off a little bit.
Uh its fortunes have been tied to interest rates.
So today is kind of a relief valve there.
And then you will also see some action in 10 in Tan, which is a solar ETF cannabis regional banks.
That’s real interesting as we see the yield curve steep in and then at the very bottom, we can see the mag seven ETF that’s mags down 4.5%.
This is the worst day for the magnificent seven in about one year.
In fact, you have to go back to the middle of July last year to find something that bad.
Also taking it on the chin and I’m going to show you a picture here, semiconductors, nvidia of 5.5 percent here, Taiwan send me down 3%.
Um I’m gonna do a deep dive on some of these bigger moves with Josh in uh about 30 minutes here.
So stay tuned for that.
But I’m gonna leave you with an upbeat note here.
This is unprofitable tech.
These are those art components and on a day that you’re seeing Tesla off 8% you’re seeing a lot of the other guys uh in the green here.
So definitely not a bloodbath all around the horn, just really those big names.
All right, Jared, thank you, appreciate S and P 500 pulling back from its record today as investors rotate at a tech.
But our next guest is still bullish overall raising his target for the S and P 500 to 5800.
And joining us now is Ed Yardeni.
Yardeni, Research President, Doctor Ed.
It is always good to have you on the show.
So you raise your target uh to 5800.
How come walk us through the reasons?
Well, I I’m becoming increasingly convinced as the market has that, uh the fed is in fact gonna start uh cutting interest rates.
Uh As you recall, at the beginning of the year, there was a lot of expectations that there might be six or seven rate cuts that never happened.
I think this uh next rate cut that’s expected in September is gonna happen.
And I think over the past couple of days fed chair Jerome Powell, uh kind of went out of his way to, uh you know, hint and wink that uh if, if things keep going, uh well on the inflation side and they continue to be somewhat concerned about what’s going on in the labor market side, they’re gonna lower rates.
Uh And uh as we saw today, uh the market uh as a result started to broaden out to the Smith cap to the small and mid cap stocks.
So, but I think all in all what I’m looking for is a very strong second quarter earnings season.
We’re about to get reports tomorrow, we get the banks.
I think the banks are gonna wind up uh reducing their loan loss provisions because there is no recession out there.
So I think they’re going to surprise us to the upside.
And then I think a lot of companies that are not, technology companies are going to tell us how they’re using A I to cut the cost and increase productivity.
They’re not gonna necessarily say that it’s making a huge change in their earnings outlook.
Uh But I think they’re gonna indicate that it could very well be an important development.
Um Ed, it’s truly here.
The conventional wisdom has always been um that if the Fed was cutting rates, not because there was some sort of, you know, overturning in the economy, but rather to bring us back to normal, that stocks could continue to rally in the face of that.
But are there any concerning signs for you?
I mean, we are seeing a little bit of deterioration in the labor market.
You have some companies today talking about consumer weakness, right?
We’ve had a couple of guests today, bring up credit card delinquencies, ticking up.
How concerned do investors need to be about those various elements?
Well, I think uh it’s important to put it in the context of recent history.
We, we did have this uh amazing uh event, not, not a happy one, uh which is the pandemic and a lot of things that really had some abnormal uh developments as a result of that, particularly the labor market.
And I think what we’re seeing is normalization.
I think we’re getting back to normal uh in the labor market.
And uh I think we’re getting back to normal and with, with interest rates, we certainly are, have gotten back to normal with inflation.
So when I put it all together, I’m not really that concerned about the downsides for, for the economy.
I’m not concerned that inflation is gonna remain sticky.
Uh And I think, uh, you know, I’m gonna listen to what the Fed Powell said and then that’s pretty strongly suggested that they’re gonna start cutting rates in September.
That’s all good for the bonds.
It’s all good for the stocks.
Uh, you know, when it comes to the stock market, skeptics, they, um, they’ll throw, throw their, uh yellow flags, they always do it right.
And, and there’s a couple of you here and I wanna get your take, you know, they’re, they’ll talk about sentiment, they’ll say too many bulls and they’ll also talk about valuation.
This market just doesn’t look cheap.
How do you answer those two?
Well, I look, uh, when, when you get too many bulls, uh you are more vulnerable from a kind of a sentiment perspective to see some sort of correction.
Uh because when you have too many bulls, there are just not enough bears to, to convert over to the Bulls and everybody presumably is, has bought.
And if you get some bad news and some of the weak bulls start to panic and, and, and get out, so it’s conceivable that there could be a correction uh in, in the works here as a result of sentiment.
Uh But on the other hand, I think it’s very important to recognize that there’s $6 trillion sitting in money market, mutual funds has been fairly satisfied earning 55 and a quarter percent on, uh on, on their money, people in those accounts.
Uh And I think if they start to perceive that uh interest rates really are coming down, uh then you may see more money going into the bond market and into the stock market, uh offsetting the canarian perspective that too many bulls is bearish.
Um uh I wanna ask you as well about the election.
Um And the sort of lack of reaction there has been uh in the markets, right?
I mean, if you look at the front pages of most of the non financial papers, they will be focused on what’s going on with President Biden and the re election campaign.
Um, when do you think maybe what, what would be a trigger for that to change for the markets to start paying more attention?
Well, it’s a great question.
I don’t really have the answer to it.
But uh II, I have observed, I think we’ve all observed and, and your question implies that the market has done remarkably well despite the political partisanship, be, be besides all the turmoil we see going on in, in Washington.
And I think, I think investors, whether they’re uh conservative or liberal Democrats or Republicans have learned over the years that you don’t wanna let politics determine your investment uh approach.
Uh So for example, uh if, if you are a big fan of uh Obama, um then uh you probably were low, the market then, but if you weren’t, you, you might not have been in the market at all and missed a very good bull market.
Same thing happened with Trump.
Uh And again, with Biden, uh we’ve, we’ve had very partisan uh white houses uh where half the country like the president, half didn’t.
Uh And yet the stock market just keeps going up.
And I think that speaks to the strength of the economy.
It speaks to the fact that, you know, Washington doesn’t matter for everything going on in our economy.
There’s a lot of us working stiffs that are going into the office and to the factory or wherever, every single day, working hard, trying to make things better and uh on balance.
Uh We, we succeed and offset the meddling of Washington.
Ed.
You raised your target on the market.
I’m just curious which sectors uh you find attractive here, Ed, what are you telling clients?
Well, I’m, I haven’t changed much in that score.
I’m still talking about technology, financials, uh industrials and even energy as a sort of a shock absorber in the event that there is a shock out of the Middle East or Russia Ukraine that leads to higher oil prices.
But uh generally speaking, uh growth is still where I want to be Ed.
Thank you so much.
Appreciate it.
Thank you.
Let’s get to some calls of the day.
Now, Bank of America is raising its price target on Costco amid strength in same store sales and it’s increased in membership fees.
And it’s part of a broad, um, positive reaction to the company raising its, uh, membership fees.
But as you can see here, the stock straight down.
Yeah, I mean, at least on the street, I mean, the stock is up a lot this year.
So this is what we were waiting for.
This is the membership fees.
Yeah, exactly.
And, and you know, there have been some analysts as well that have, uh, looked into the history of how Costco then does after it raises its membership fees.
Um, and it tends to go up.
We heard Corey Tarlow of Jeffrey’s at the top of the show.
He was on the morning show, but we heard a little bit of his commentary where you talked about that people don’t leave Costco even when the, even when the fees go higher.
Oh, absolutely.
That my old man, it’s the only place he’s going for steaks.
Absolutely.
Bank of America.
By the way, they say the strong June comp and the announcement of this fee increase means they take their price objective, Julie to 962.
Given they say continued comp strength and greater earnings visibility.
So they’re fans, but let the stock go down, darn restaurants hit with a downgrade from Jeffrey taking the stock from a whole to underperform rating, sign risk to fundamentals.
So team at Jeffrey’s, they do downgrade this one, the equivalent of ac target 124.
Of course, the operator of uh Olive Garden chain, they talk about share loss in a more promoted environment.
Julie question whether these folks are gonna be able to compete against more lucrative discounts and promotions elsewhere in the casual dining segment.
Yeah, and they’re looking at full service in particular and says that more value conscious consumers are weighing on any share gains for full service.
Um So if you’re looking at something like an Olive Garden, for example, or Chewy’s, which is another stock that they got a little more cautious on.
Uh those are restaurants where you go, you sit down, somebody comes to your table, you order.
Um they’re also more expensive as a result of having that full service.
And so this is one of the things he talks about.
He says, um they could become increasingly dependent on traffic and that the value companies within this restaurant universe will benefit in this type of environment.
Yeah, they say listen, Darton does possess, they call it a robust port full of assets.
But they say we see risk to more moderate growth in the near term that could continue to weigh on fundamentals and valuations.
So they slap a sell on it.
Yes, they do.
But the stock is not down.
No, not today, but we’ll see what happens.
All right, monthly consumer prices dropping for the first time in four years.
That’s a welcome sign for investors hoping for interest rate cuts this year, we will discuss in more detail.
Next, the latest CP I print, that’s the consumer price index for June coming out today cooler than expected.
And that slowdown could be what the FED needs to start cutting rates for more.
Bringing in set carpenter, chief global economist at Morgan Stanley.
Good to see you set.
Great to be here.
Thanks for being in.
Um So the thinking now, at least the consensus is coalescing around a cut in September and perhaps one more cut before the end of the year.
Is that in line with how you guys are thinking of it?
And was this was this that data point that the fed needed?
This is definitely one of them, but it’s good to remember, go back a month and we had another CP I print that surprise consensus to the downside as well.
Uh Our baseline is and has been for a while, three cuts this year and before last month’s print, the amount of hate mail we would get was incredible.
Uh And I said, just wait for it.
And then we got last month’s print and people started coming around saying you might be right.
But boy two is probably as far as it can go.
Uh We get today’s print and I think you’ll see market pricing is actually creeping even further.
So the market is pricing in a little bit more than two cuts for the rest of the year.
So far, we think they get there.
Um Some of the communication from fed officials today has been, I think in the same direction, I thought Chair Powell’s testimony this week was really important where he said, uh we’ve seen some progress.
He called the progress on inflation modest, but that was before today’s data.
But he also said, you know, we have to pay attention to both types of risks if we stay too high for too long, we put it at risk, employment.
And so I think what today’s print does both gives them that much extra confidence.
Inflation is coming down.
And if they do start to see any signs of weakness in the real side of the economy, they’ve got greater latitude in order to be able to react to that le let’s talk about that labor market Seth.
I’m, I’m curious to get your take because it is cooling.
But when you look at the labor market, are you concerned?
Concern?
No, but I will say the, the job market report from last month, I’ve been, I’ve been telling people it’s like a Rorschach test, whatever was already in your mind and you look at the print, you can see it there.
Um So I look at the headline number, 200 or so.
That’s a pretty solid number.
Definitely cooler than where we were six months ago, a year ago, two years ago, for sure.
But by all counts 200 jobs per month is pretty good for the US economy.
The private number, which is probably giving you a better signal on where the actual market based economy is going was even softer than that.
And it has been decelerating for the past couple of months.
But if you start to open the aperture a little back a bit and go back a year or two, you see that that sort of has been going up and down.
It’s been trending down a bit, but it’s not falling off of a cliff.
So, yes, we think they’re slowing in the economy.
Yes, the labor market is not as tight as it was before, but that’s a good thing.
And that’s very much by design.
That’s what the hiking by the Federal Reserve was designed to do was to put the brakes on just a little bit to the economy.
Um There’s another area of the economy where there was a little relief in CP I today and that was shelter costs.
But you guys recently put out some research looking at housing in the US that I thought was really interesting.
And among other things, it pointed out the gap between people who have mortgages who are in their homes already.
And then as we see there on the right side, the tick up in the actual mortgage rate if you’re go if you’re buying a home now.
Um unfortunately, Josh is keenly aware of this right now.
Um So, so Seth, even if rates now start to come down, what’s going to be the lag effect for the housing market, how long is it going to take that to really recover?
It’s a great question and so shameless plug to my colleague, Jimmy again, who’s our housing specialist?
Fantastic.
And he and I spend lots of time talking about this.
Uh The first thing is we, we came to this from the inflation side of things and it’s really important to separate the current housing market, especially for things like new homes or existing home sales and things like that from the inflation data.
They’re very, very separate, the inflation data comes from quotes, the VLS gets on actual rents.
And so the fact that that part of inflation is coming down and we think will continue to come down for the rest of the year, that’s actually not much of a surprise because we can look at the actual data on rents and it tells you very clearly where that inflation is going.
The housing market, current housing activity is driven by lots of things, mortgages, especially available supply.
So what’s likely to happen?
We don’t think even with our forecast of the fed cutting rates more than what’s in the market, it’s gonna be enough to really move that the on the chart that you showed the, the sort of average effective rate for, for people down to anything like where other people are right now.
It’ll bring things down for sure.
In long term interest rates can come down.
It’ll help with mortgages.
Um, but the majority of people who got 30 year fixed rate mortgages back in 2021 2022 they’ve got a mortgage that starts with a two or a three.
We’re a long way away from that.
So we think the housing market’s gonna move mostly sideways.
Think about a bull case, a bear case.
It’s probably single digits either up or down.
Um, uh, and, and I don’t think the, the cutting from the fed that we expect to happen over the next call, it six months to a year is really gonna be enough to move that needle.
Let me ask you something.
You know, we heard from, we got some earnings reports today as you look through the reports, you listen to the CEO S and they talked about the consumer.
You know, there were some reasons for caution, had kind of a cautious tone to it.
I’m just curious, your take on the American consumer, you know, where are we Seth?
Where are we headed?
Are you nervous?
Um, nervous, not, not particularly nervous, but if you meet an economist who’s not sort of on alert, then they’re not doing their job.
Um II, I think in the same way that I was talking about the job market, we’re seeing cooling.
I don’t think anyone can argue with that.
Uh We’re seeing some normalization if you go back a year, two years, uh the consumer was on fire.
Uh The purchases in particular were heavily skewed towards goods that normalizing.
And so if we look at the data so far this year, much weaker demand for consumer goods, but some of that is just pay back of wallet share from the, the battle days of the the pandemic when uh people were going out much less than spending on goods.
So there’s definitely that slowing.
Uh we don’t think we’re gonna fall off of a cliff.
There’s gonna be some segmentation, the upper end of the income distribution.
Absolutely still spending, especially spending there on services.
And, and I think that’s part of what’s going to keep the economy chugging along why we can slow without crashing.
And so it will be a AAA fractured consumer at the bottom end of the end of the distribution.
You see delinquency rates drifting up a little bit.
Uh, their wage gains have slowed down compared to where we were a year ago.
So definitely some slowing, definitely some, some spread in the distribution.
But I don’t think, uh, we’re at the point where we’re looking at the consumer just coming to a halt.
Um, and you are, as we mentioned, the top, the global economist.
So I always like to ask you a little something outside of the US.
Um We’ve got meetings going on right now, but there’s been a lot of attention on Europe and the elections that just happened there.
Um Are you thinking about any sort of economic repercussions about from those elections?
I mean, particularly in France, for example, where there’s been a lot of talk that Emmanuel Macron won’t have the economic mandate that he has had.
Absolutely.
And I have to say this year is a remarkable year from beginning to end in terms of elections all the way around the world.
We had, you know, India, really big economy with an important election and several others for France, one of the places where the market has really been focusing is what happens with the fiscal situation.
And sometimes you’ll get fiscal situations where if you have a fractured government without a clear mandate, much less gets done and you can get fiscal consolidation.
The risk on the other hand is to bring people together and to get anything done, you have to give say yes to everyone.
And so one of the places where initially, I think after some of the, the preliminary elections, including for the European elections overall, uh the market started paying attention was, are we going to see some sort of fiscal loosening?
And you saw it show up in, in o spreads?
Um Right now we’re at the place where we’re waiting to see what sort of government gets formed, what the plans are.
Uh because I do think it will be very, very challenging uh for Macron not having sort of a uh I if he’s not able to assemble enough of a coalition to really drive forward uh his own plan.
All right, Seth, we’re always lucky to have you on the show.
Thank you for joining us.
Appreciate it here.
Time now for to watch Friday, July 12th, starting off on earnings earnings season is back with big banks on deck ahead of the open JP Morgan Wells Fargo City Group.
Analysts are keeping a close eye on net interest income for all three.
And the banks will also provide more insight of course into the health of the consumer.
And we’ve got another inflation reading on top.
The producer index is out ahead of the open economists forecasting overall PP I as well as core PP I will increase month over month in June.
This coming after today’s consumer price index came in cooler than expected and more on the economic data from consumer sentiment for July due at 10 a.m. Eastern.
That number expected to tick up slightly to 68.5 giving us inside against the state of the consumer.
And finally, we’ll be keeping an eye on reaction to President Biden’s news conference tonight.
He is planning to take questions at 6:30 p.m. Eastern coming as Biden wraps up the NATO summit in Washington DC and will serve as another test for Biden to convince critics that he’s capable of continuing his campaign for re election.
And that’ll do it for today’s market domination over time.
Be sure to come back tomorrow at 3 p.m. Eastern for all of your coverage leading up to and after the closing do, but don’t go anywhere on the other side of the break.
It’s asking for a trend.
Got you covered for the next half hour with the latest and greatest market moving stories so you can get ahead of the themes affecting your money.
Stay tuned.
