July’s CPI (Consumer Price Index) reading of 8.5%, a significant drop from June’s number of 9.1% coupled with surge in consumer confidence injected euphoria into the markets. With first signs of decline in inflation, the Fed must rethink its quantitative tightening posture. With no Fed meeting in August, the next meeting in September will provide another month of inflation data. If August’s CPI continues to drop to 8% or below, the Fed will have to cut back on its aggressive interest rate policies and likely go with a 50 basis points increase or less. Another 75 basis point interest rate on the back of declining inflation may be seen as move that could put the recession discussion back on the table.
In the meantime, Wall Street celebrated with the S&P 500 and Nasdaq up 3.2% and 3.1% respectively and Dow jumping 2.9% for the week.
Future Wealth’s View
In last week’s report, we had stated that “Despite what the Fed does in the coming months, Wall Street is looking ahead to 2023 and the fundamentals will begin to reign once again”. Indeed, the move this week on Wall Street sure appears to look like the traders and investors are looking beyond the rest of the interest rate hikes and inflow of money into equities suggests the appetite for risk taking in back.
Despite the run up in the Nasdaq, we, at Future Wealth LLC, believe that defensive sectors will likely do better than growth in the coming months. As the economy cools down coupled with the prospect of the Fed bungling again in September still a possibility, we believe that value sectors will outperform growth as investors will remain cautionary but still want to be invested.
One bellwether indicator to the upcoming economic slowdown is from semiconductor companies like Micron, AMD and Nvidia – all warning of weaker demand. Reaching into the depths of my years as a Semiconductor Analyst on Wall Street, a nugget to share is – Semiconductor companies see weakening demand well before the retail outlets report their declining numbers. What the semiconductor companies are telling us is that the US economy and the global economy is going to shrink in the second half of 2022.
Pay attention to comments from rest of the semiconductor companies who have yet to report Q2 earnings. You will be glad you did.