This week, Frank Reilly, MIBA, takes a moment to remember Tom Weary, CFA®, RFA’s late Chief Investment Officer, before touching on GDP, jobless claims, and earnings from tech companies Sony and Meta.

Transcript

Welcome to the Weekly Market Update. If you have not seen the email from us about Tom Weary, it is with much sadness that I share that Tom Weary passed away on July 22. Tom joined us as our Chief Investment Officer in 2019, although, it feels much longer. Tom quickly showed his colleagues and our clients his intelligence, wit, and compassion and became well respected and appreciated by both. Tom loved what he did and came into the office everyday with a bright smile and positive attitude, an attitude he kept until the end. We will certainly miss Tom’s sage wisdom, comforting words, and optimistic personality. And I would like to say, I’ll miss him as a friend as well. And in the coming weeks, we are excited to introduce you to RFA’s newest Chief Investment Officer, Ramesh Poola.

Now, to use Tom’s words, let’s jump into this week’s market update.

Economy

While U.S. job openings came down by 605,000, to its lowest number since last November, there are still a record 1.8 jobs available for every unemployed person, as you can see in this chart. In the second quarter we saw nonfarm payroll growth of 372,000 per month while the unemployment rate stayed steady at 3.6%. These signs of a strong labor department contradict GDP indicators of a recession. We will continue to look to the labor market for any signs of deterioration. However, in a battle with inflation, it is expected that unemployment will increase, a sign that the Fed’s rate hikes are working.

While inflation, which we’ll discuss next, remains high, one significant cost for consumers has continued to come down. The national average cost for gas has declined for the 7th consecutive week and is down to $4.20 from a high of $5 in June.

In June, the Fed began another program to help combat record high inflation numbers. The Fed has quickly changed from Quantitative Easing to Quantitative Tightening. Instead of buying approximately $120 billion in bonds per month, they now expect to sell $95 billion in bonds monthly. Fed analysts estimate that every trillion-dollar reduction in bonds from the Fed’s balance sheet equates to a .20% increase in interest rates. While we reported on slowing GDP last week, that news may point to success on the Fed’s part as higher rates that slow demand and growth, should bring inflation in check.

Earnings

US stocks rose again mid-week after earnings continued to come in better than expected.  Over 70% of the S&P companies have reported earnings as of this week.  Overall, the companies that have reported have managed to beat analysis’ earnings per shares estimates by 3%, surprising Wall Street who had been braced for a gloomier outlook before earnings season began

One of many tech companies reporting was Sony, who saw sales up 2% to $17.8 Billion in the last quarter.  Sales were driven by the strong demand in Sony’s music and movies, despite having to weather production setbacks from covid-19 lockdowns during the quarter.  Despite posting a 9.6% increase in first-quarter operating profit, they did cut their profit forecast for the next quarter citing a possible lull in video games sales as covid restrictions ceased.  However, they did express optimism that supply chain improvements and their upcoming game slate would see positive Play Station sales entering the holiday season.

Meta Platforms, the Facebook parent, saw their shares rise over 5% mid-week following reports that they may utilize bond markets to raise capital.  This would be Meta’s first ever bond issuance.  While it is their first issuance, they are certainly not the first tech company to do so, as Apple and Intel had similar announcements recently.  Meta’s management seems motivated to look for another source of financing before borrowing costs rise further in order to maintain their strong balance sheet.

What Does It All Mean?

So, what does it all mean? While we see positive news in the labor department and in lower prices at the pump, it is clear that the Fed is not done and their actions may continue to impact GDP in the second half of the year.

What we know from history is that one indicator cannot accurately predict if a recession is coming or not. That is why our Investment Committee looks at many indicators, sector specific risk, and the performance and outlook of the companies in our portfolios. We meet next month to discuss our Defensive strategies and will welcome Dr. Ramesh Poola, who you’ll see on the Vlog in two weeks. So please, sit back, relax, have a great weekend, and join us next time for the weekly market update.

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