@theMarket: Stocks Battle Back to Even

It was a good week in the equity market. The bounce back from the 8 percent sell-off at the beginning of the month is but a distant memory. Does that mean we are in the clear for further gains?

 

Maybe. So far, the financial markets have seen a "V" shaped recovery from the lows of Monday a week past. Technically, that is a rare occurrence after a downdraft of that magnitude. And yet, that is exactly what has happened thus far.

 

The gains have been helped by a spate of good corporate earnings, with 80 percent of S&P 500 companies beating estimates. A few benign macroeconomic readings suggested continued economic growth, a lessening of inflation, and a still strong if moderating, labor market. What's not to like about that?

 

It appears the yen-carry trade has been relegated to the back burner. Japanese stocks have recovered most of their losses and the yen has weakened versus the dollar every day this week.

 

On the geopolitical front, the awaited response to Israel's assassinations of several Middle Eastern terrorist chieftains has not materialized. Iran appears to have telegraphed that while it is still considering a response, much will depend on whether a Gaza cease-fire agreement can be hammered out by the combatants.

 

Both the Producer Price Index and the Consumer Price Index for July came in on target or even a little cooler depending on how you parse the numbers. July retail sales were a big surprise rising 0.4 percent, double the consensus of a 0.2 percent increase. That put to bed worries over faltering consumer spending.

 

And once again this week, unemployment claims came in less than expected at 227,000, down from the 234,000 the week prior. Given the data, economists are now calling the disappointing non-farm payroll number of two weeks ago an anomaly possibly caused by fallout from Hurricane Beryl.

 

There is also a bit of excitement and consternation surrounding the election campaigns of both candidates. This is the season of promises where politicians dangle new and tasty carrots before the electorate. Donald Trump has floated the idea of making social security benefits tax-free while arguing that he should have more control over central bank decisions.

 

Kamala Harris unveiled her economic policy initiative on Friday. She is promising to slap price controls and other penalties on price gouging in the grocery industry and make it harder for food producers to acquire distribution businesses like supermarkets and grocery stores. 

 

She also wants to cut taxes for the middle class and expand affordable housing. Both candidates are now talking about making tip income tax-free as well. In the meantime, government Medicare officials have also negotiated lower prices for 10 drugs including some in cancer, blood clots, and diabetes areas for the first time. It may represent a turning point to rein in healthcare costs and could save billions of dollars a year in Medicare payments. Harris is promising to expand this effort in the years to come.

 

On Aug. 22, the yearly Economic Policy Symposium in Jackson Hole, Wyo., will kick off. Federal Reserve Chair Jerome Powell will speak next Friday. Investors will be sure to parse every word of his speech to get his latest thoughts on the interest rate front.

 

Marketwise, we have officially recouped all the downside which occurred at the beginning of the month. Staying invested and/or buying the dip proved to be the right thing to do. There may be more volatility ahead since August into September is seasonally the worst period for the markets. My advice is to keep your eyes on the long term, which seems to be fairly rosy.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.