This week has been another week of gains as the market tries to make it a 4th week in a row finishing in the green. If it does, that would make it a nice month-long rally which, so far, has been great to see. And hopefully is a sign of better days ahead. But we should not look too far ahead, and we should not lose sight of potential headwinds out there because there are plenty of outliers which could cause more volatility. Namely geopolitical with the continued war in Ukraine and now Taiwan and China heating up. And of course, the Fed and interest rates here at home. We should also not lose sight of the other part to the Fed’s process here as they sell off their balance sheet. Namely quantitative tightening. That will introduce upward pressure on yields and naturally rates as well but the point is the Fed doesn’t usually do both at once. So, there are plenty of unknowns still lingering out there right now and instead of calling the win here, we should be taking it “one day at a time”.
Speaking of which, we had one of those days this week with Wednesday’s July CPI report which came in at 8.5% y/y and finally showed a deceleration on the all-important inflation topic. Yes, it was nice to see inflation come down but 8.5% is still very high and the Fed is going to keep an aggressive stance on rates until it comes down substantially. So, we are definitely not out of the woods yet. It is also important to point out that one of the big reasons why inflation came down was simply the decease in energy prices across the board over the last month. Energy was down 4.6%, gasoline was down 7.7% and fuel oil was down 11%. So that was a big factor in this month’s decline. But if you take that out and look at the “core” inflation (ex food and energy) that actually rose in July by 0.3% and is now up 5.9% over the last 12 months. And if you look at food alone, that was up 1.1% in July and is up a whopping 10.9% over the last 12 months. So, there is still a broad-based core component to inflation which is still very high and still going up. Factor in a possible energy reversal back to the upside (because energy is so volatile and can move on any geopolitical event, i.e. China/Taiwan) and that puts us right back to where we’ve been on inflation. Or at least with energy prices. Case in point we are heading into the winter heating season and Putin continues to play games with Russian oil and gas supplies. Plus, China is reopening which will introduce more demand pressure and could disrupt the all-important supply/demand balance that helps keep energy prices in check. So again, we should be looking at the current environment one day at a time here and taking all of this into consideration.
Earnings continue to come in this week as well. Although as of August 5th, 87% of S&P 500 companies have already reported (with a 75% positive EPS surprise and a 70% positive revenue surprise), there have been a few names of note that have reported this week. For example, Disney had a very nice report citing a strong streaming service on 152 million subscribers. Which is nice to see on top of their core parks business which also showed an impressive revenue increase of 72%. Dillard’s also reported a very nice quarter with impressive metrics on their margins and earnings with EPS up 44% and gross margin up 240 bps. We own Dillard’s in the Trident mid-cap stock model and we will be adding Disney to the Triumph all-stock model and Blend models as well.
Even though we may be starting to see life coming back to the market – and companies are reporting well – we still have to take this as a “one day at a time” approach right now. That said, we still think it makes sense to take a high quality/defensive approach with an active tilt towards managing assets at this time. Focusing on companies that can manage around high inflation makes sense at this time too. Such as those that have strong balance sheets and strong pricing power. This is what we are doing in the GVA Asset Management Models. But don’t lose sight of growth which has always been a nice core hold for portfolios when markets settle. Which we expect to see in 2023 and beyond as things work themselves out. Valuations in that space are very attractive right now too, especially in tech, discretionary and even financials in this rising rate environment. All of which we have healthy exposure to in the models.
Let’s take it one day at a time here and process the information as it comes in. But continue to focus on the long term, expect ups and downs along the way, and invest in the asset classes and companies that make sense in this environment.
Thanks for reading and have a great “One Day at a Time” August weekend!
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*All data sourced from Yahoo Finance as of the close on the date indicated.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.