Soft Landing

1.Economy Holding Up in Face of Adversity. The resilient consumer is tied to continued job availability and higher real wages. Consumer confidence is rising – improving in June to its highest level since January 2022. Rising confidence and a strong jobs market lead to buying more homes – mortgage rates have retreated from peak, and while existing home supply on the market remains limited, new home sales and building activity are growing. Activity in the housing sector also generates good momentum for correlated autos and goods sectors. Positive service themes have been ongoing since 2021 and continue to drive the economy.

Positive jobs indicators and strong consumer spending flow into corporate profits. We do not anticipate an earnings collapse. Q2 earnings season is in full swing this week, after most banks reported good earnings last week.

2. Banks Confirm Consumer Strength. Banks are raising provisions for loan losses, while benefiting from the higher interest rates in the form of net interest income. Loan loss provisions are rainy-day funds for banks. Banks are increasing these provisions to manage customer default risk, adhering to regulatory requirements, as loans build at higher interest rates. Overall, loan defaults remain historically low, and provisions have been rising for much of the past year.

Synchrony Financial (SYF), a consumer-focused credit card servicer, did not cite any cracks in the consumer. Higher net interest income fueled earnings beats for Wells Fargo (WFC) and JP Morgan (JPM). Wells Fargo said that excluding office, “the rest of the commercial real estate portfolio is performing quite well.” Credit card spending increased, along with mortgage originations. We hear from more of the small/mid-sized banks this week.

Listen to Walt Bettinger, CEO of Charles Schwab (SCHW), talk about consumer optimism on CNBC.

3. Oil Price Rising. The price of oil is rebounding off of its June lows. Negative sentiment drove the commodity lower, but sentiment is now improving, and economic activity is resilient. Brent oil is finding support around $71 per barrel.

Chart 1: Oil Rebound in July Above $80 per Barrel¹

SLB (SLB), an oilfield services and technology company, reported an expectation for stronger second-half cash flows that will lead to higher annual free cash flow y/y. Industry cash flows continue to come in at record levels as offshore drilling and non-U.S. activity drive upstream oil production. Interestingly, U.S. oil rigs are down -12% y/y, while global rigs are +7% y/y.

Another commodity, copper, is experiencing a price resurgence. Copper is often a leading indicator for economic strength as a key input in infrastructure and electrical components demand. We are continuing to watch this commodity.

4. Labor Actions. A looming workers’ strike at UPS (UPS) is expected to create a bit of chaos for business and consumer shipping. UPS handles roughly 28% of America’s freight. A potential beneficiary, FedEx (FDX) has not seen an influx of UPS customers switching in anticipation of a strike. The potential UPS strike and ongoing writer’s strike in Hollywood emphasize the power that labor unions currently maintain in a tight job market.

5. Fixed Income Strength. For the past month, market commentary has been “lower yields.” However, since June 21, the short end has continued rising faster than the long end. The 2-yr is up 13 bps and the 10-yr is up 11 bps, furthering the yield curve inversion, which currently stands at -103 bps.

After this week’s Initial Jobless Claims came in below estimates (228,000 vs. est. 240,000), the likelihood of a second additional 25 bps hike in September increased. Investors will be listening to Powell’s commentary on the labor market and outlook at Jackson Hole in late August. Consensus is for a 25 bps hike at this week’s FOMC meeting on Wednesday.

6. The Week Ahead.

Earnings – Monday: DPZ. Tuesday: GE, DOW, GEHC, CLF, RTX, ADM, MMM, MSFT, DHR, GM, GOOGL, PCAR. Wednesday: KO, UNP, BA, META, LRCX, T, HLT, OTIS, CMG. Thursday: BMY, VICI, VLO, CARR, KDP, LHX, MCD, HON, MA, LUV, F, MDLZ. Friday: XOM, CVX, PG.

Economics – Monday: Preliminary PMIs (July). Tuesday: Consumer Confidence (July). Wednesday: FOMC Meeting. Thursday: GDP (Q2), U.S. Federal Reserve Basel III Meeting. Friday: Core PCE (June), Employee Cost Index (Q2).

Stephanie Link: CNBC TV Schedule

Return for Selected Indices²

Disclosure

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

Sources

1. Source: FactSet (chart). As of July 24, 2023.

2. Source: Bloomberg. As of July 23, 2023.