The Market was up in a short week following the July 4th holiday. All market indexes gained for the week, as some on Wall Street believe a global downturn won't be as bad for companies as widely feared.
The S&P 500 gained +3.03%
The NASDAQ Composite surged by +5.56%
The DOW Jones Industrial Average edged up +1.83%
The Russell 2000 rose by +3.68%
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Are we in a recession? If not, when will we enter one?
These seem to be the investor's overriding questions as the stock market oscillates from surging gains one week to sky's falling losses the next.
While most business leaders and investors agree that economic growth is slowing, there doesn't seem to be a consensus on how bad it will get. While leading economists point out that the combination of high inflation, rising interest rates, and energy shortages point to a rough year ahead, Wall Street analysts still expect corporate earnings to remain a record high levels.
Demand remains strong despite very low consumer sentiment, enabling companies to pass on price increases to customers. Higher prices for us equals more profits for companies, such as oil refiners.
And as stocks rallied, beaten-down high-risk assets, like blockchain and biotech companies, were among this week's biggest gainers. The volatility trade is risky business though.
The US may be facing another headwind in a strong dollar, which could threaten international demand for US goods.
The dollar is the most expensive it has been in 20 years
Since the start of the year, growing fears of a global downturn have pressed investors to sell equities, wiping $18 trillion from global equity markets, and move to hold the US dollar to ride out the worst of the storm.
In downturns, investors typically shift their portfolio allocations to US treasuries, but rising interest rates have depressed bond prices this year, making them unattractive. Thus the dollar has become a solid alternative to bonds to park capital.
This behavior is doubly true abroad, as rising inflation in home countries has caused international investors to look to the US as a safe harbor for their financial holdings. But as more investors want US dollars, its value increases. In 2022, the dollar's value against a basket of global currencies has risen by 12%.
In Europe, demand for the US dollar is exceptionally high, as Russia's invasion of Ukraine has ignited high inflation and depressed growth across the continent. As European investors flock to the US dollar, they must buy it, causing its relative value to rise compared to the Euro.
Since the start of the year, the Euro has lost nearly 10% in value compared to the US dollar. One can now buy 1 euro for just 1.02 dollars (compared to 1.14 at the start of the year), which is the lowest price in 20 years.
…and this isn’t good for growth
While this change in currency exchange rates is favorable for American travelers vacationing this summer in Europe, it could also be at the expense of US companies. A strong dollar makes American goods more expensive to buy, which could depress international demand, which is problematic for the modern multinational corporation.
From the perspective of European consumers, US goods are now 10% more expensive than they were at the start of the year. This change in foreign exchange rates also stacks on top of high inflation, which topped 8.6% in June for the European Union.
Companies from Microsoft to Apple have already cited that a rising dollar could negatively impact their annual earnings. The silver lining is that US companies can purchase supplies from foreign companies for less, which could dampen inflation over the long run.
But, all in all, a strong dollar is bad for US companies’ revenue growth as it shrinks global demand for US goods and is widely cited as a leading indicator of a recession. And if a global recession does come to fruition, it could compound the process leading to the dollar's rising value.
Stay Frosty,
Alex with TAI
Below are this week's gainers and losers.
Weekly Gainers and Losers (7/5 - 7/8)
The recession trade is in full swing, with global investors bracing for slower growth and moving to the safety of the US dollar.
Commodities have pulled back from their red hot streak over the past 12 months, while underperforming sectors like crypto and biotech regained Wall Street's interest in short-term volatility trades.
These are some of this week’s biggest ETF gainers:
Global X Blockchain and Tech ETF (BKCH): +20.20%
After a couple of troubling months, blockchain companies had their best week in three months as large investors signaled support for Bitcoin at the $20,000 level. However, most cryptocurrencies are still down more than -50% this year and are far off last November's high of $66,000.
Ark Genomic Revolution ETF (ARKG): +18.96%
Risky assets, such as small-sized biotech and genomic companies, have had a rough year, with ARKG down more than -40% this year. However, the sector has surged over the past two weeks as it was alleged that pharma heavyweight Merck (MRK) seeks to buy immunotherapy company Seagen (SGEN), reigniting acquisition interest in the space.
US Natural Gas Fund (UNG): +8.21%
Natural Gas has surged this year following Russia's invasion of Ukraine. While the price of natural gas has fallen -33% from highs in June on recession fears, demand still far outstrips supply as consumers turn on their air conditioners in the summer months.
These are some of this week’s biggest ETF losers:
Breakwave Dry Bulk Shipping ETF (BDRY): -10.95%
Shipping futures fell for the week as the probability of a global recession grew across the world. Manufacturers worry that a downturn will suppress consumer purchasing, slowing shipping demand.
S&P Oil & Gas Equipment & Services SPDR (XES): -4.47%
While gasoline prices remain elevated, crude oil prices have been dropping due to worries of a global slowdown. Oil equipment and service providers, such as explorers, have sold off as investors assess supply and demand forecasts for oil.
Gold SPDR ETF (GLD): - 3.66%
Gold typically has an inverse relationship to the dollar as they are substitutes for one another: gold drops when the dollar is strong, and vice versa. Having risen more than 10% this year, the strength of the US dollar is near a 20-year high, causing gold prices to fall.
Further Reading:
Bloomberg: Is a Recession Coming? Investors Turn to Earnings for Clues