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Strong Economic Precedes Earnings Season

By:JJ Kinahan

The bull market persists against the backdrop of solid economic data and declining gold prices. But a closer look at the market's narrow leadership warrants concern.

  • The jobs number misses, but economic data stays strong.
  • Gold is signaling less concern about inflation.
  • Threads is pulling at Twitter.

Markets had their worst day since early May on Thursday. The S&P 500 and Nasdaq Composite both fell 0.8%, with all sectors of the S&P 500 closing in the red. The catalyst for the pullback was a stronger-than-expected reading on the economy. Those numbers were followed up by this morning’s June employment report, which showed 209,000 new jobs added; slightly below estimates and the first miss in 15 years for non-farm payrolls. The unemployment rate ticked down slightly to 3.6% from 3.7% in May. Taken in total, this all but guarantees a rise in interest rates when the Federal Open Market Committee, or FOMC, meets in late July.

One of the more interesting aspects of what we’re seeing right now is how this market is being perceived. So much of the focus has been and remains to be on interest rates. Lost in the shuffle, however, is the continued strength and resilience of equity prices. Yesterday notwithstanding, stocks have largely shrugged off the interest rate narrative and instead appear more focused on the very strong economy. I would also argue that gold furthers my thesis. 

Gold is on track for its fourth consecutive week of losses. Normally, in a rising interest-rate environment, you would expect gold prices to increase as a hedge against higher rates. The fact that gold is falling suggests to me that while inflation is continuing, it’s doing so at a contained pace. Stated differently, markets are making the case that the Federal Reserve has contained inflation—while it may not be coming down dramatically, it has stabilized.

If there is a potential Achilles heel in this market, I think most observers would agree it is the concentration of just a handful of stocks leading us higher. However, our own data here at tastytrade is showing our customers beginning to nibble on stocks in other sectors like energy. If investors are broadening out into other sectors, that would undoubtedly be good for the market as a whole and it makes a strong case for the path of least resistance being higher at the moment.  

Taking a look at some individual stocks, shares of Tesla (TSLA) are basically unchanged in premarket. However, sales of electric vehicles (EV) overall in the first half of the year were up 50% versus just 10% for combustible engines. The increase in EV sales, while strong, is down from full year 2022 when EV sales increased 65%. Tesla, which own 60% of the EV market, is the clear winner here, and I believe it has largely solidified its place in the wake of other EV manufacturers agreeing to use Tesla charging protocols.  

Elsewhere, shares of Facebook parent, Meta (META), were down slightly on Thursday. Late Wednesday night, the company launched its Twitter competitor, Threads. It’s estimated that 30 million users signed up for Threads in the first 24 hours. While that number is less than 10% of Twitter’s average daily users, it is the first serious threat we’ve seen to Twitter thus far. Shares of Meta are up 138% year-to-date. 

Another company worth mentioning is Samsung. The company announced it is expecting a 96% drop in profits because chip demand for personal computers and cell phones has dropped. An interesting aspect to this story is how Samsung might end up the beneficiary of the heated trade war between the U.S. and China. Samsung is a South Korean-based company that isn’t affected by U.S. restrictions on advanced chip sales to China. Should the trade war continue to escalate, we could see China pivot from American chip manufacturers to Samsung. This story is worth watching. 

Finally, next week will kick off earnings season. Banks will begin reporting on Friday. I’m very interested to see how they have fared in the last quarter. Normally, higher interest rates are a good thing for banks as they lend out at higher rates in the long term while borrowing at lower rates in the short term. However, when the yield curve is inverted, as it is now, those longer-term loans are at rates lower than what it costs to finance those loans. Therefore, it could be a choppy earnings season for financials. As always, I would stick with your investing plans and long-term objectives. 

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.

JJ Kinahan is the CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee.

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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