Get Prepared for the Most Active Market Week of the Summer
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Chapter 1: Anticipating Market Movements
As the summer season progresses, the stock market offers a substantial opportunity for long-term wealth accumulation. However, staying updated can be challenging in the short term. The upcoming week promises to be one of the most dynamic of the year, potentially leading to significant market activity.
While the overall market may not exhibit drastic changes, the implications of this week's events could shape the year's conclusion. Key items to monitor include Q2 GDP statistics, a potential interest rate hike from the Federal Reserve, and a wave of company earnings reports.
Section 1.1: Understanding Q2 GDP Data
The US Bureau of Economic Analysis will release Q2 GDP data on Thursday at 8:30 AM. This report is pivotal, as consecutive quarters of negative GDP are typically seen as indicative of a recession. Following a 1.6% annual decline in Q1, another negative reading this quarter could confirm recessionary conditions.
Analysts are divided in their forecasts for the Q2 data. While some predict a slight downturn, others foresee a marginal increase. The prevailing view is that there will be little deviation from last quarter's GDP figures. Personally, I lean towards anticipating a slightly negative reading, which could validate existing recession concerns. However, simply declaring a recession based on GDP results lacks weight, as the National Bureau of Economic Research officially designates recession periods, considering factors such as rising unemployment and decreasing consumer spending—indicators that may take time to develop.
Section 1.2: Federal Reserve's Upcoming Decisions
The Federal Reserve will convene from Tuesday to Wednesday, with updates expected Wednesday afternoon. A 0.75% interest rate hike is widely anticipated and has already been factored into market expectations.
The pressing question is what actions the Fed will take in September. Following the last meeting's hike, rates have escalated from 0% to 1.5% since March, with the upcoming increase expected to elevate rates to 2.25%. To combat inflation, the Federal Reserve will likely need to continue raising rates. However, the ultimate target for these rates and the duration of such measures remain uncertain—even to the Fed itself. The act of raising rates does not directly correlate with immediate inflation reduction.
It is plausible that by the time interest rates reach a satisfactory level for the Fed, a recession may have already begun. The Fed will then face the dilemma of managing rates, as their conventional strategy involves lowering rates to stimulate growth during recessionary periods. While inflation is stated as the top priority, the potential recession stemming from tighter monetary policies looms in the minds of Federal Reserve officials.
Chapter 2: Analyzing Company Earnings
Several major corporations recently disclosed their earnings, particularly banks. This week, over 30% of the S&P 500 companies will report their quarterly results, with many notable tech firms set to present.
Prominent names include Microsoft, Alphabet, Meta, Apple, and Amazon, along with companies from other sectors like Visa, Mastercard, Coca-Cola, McDonald's, and Boeing. According to FactSet, about 70% of companies that have already reported exceeded estimates, while 26% fell short.
Market responses to these earnings have been varied. For instance, Netflix lost nearly a million subscribers, and Tesla's impressive profit streak ended, yet both companies saw their stock prices rise the next day. In contrast, American Airlines and United Airlines experienced declines after announcing reduced flight schedules for the remainder of the year. Snap's stock plummeted almost 40% following its weakest quarterly sales growth as a public entity.
Final Thoughts
This week is poised to be quite eventful. While some individual stocks may experience significant fluctuations, I do not expect the broader market to make drastic moves in either direction. Media outlets will likely seize on the GDP data and economic narratives, declaring a recession if Q2 figures turn negative, even though an actual recession may still be months away.
In the short term, not much may unfold from this week's activities. However, in the grand scheme, it represents a pivotal moment in the ongoing economic landscape.