Friday, July 1, 2022

Markets slide on growing recession fears

Dow dropped 103, decliner over advancers 4-3 & NAZ was off 27.  The MLP index was flasttish in the 189s & the REIT index rebounded 4+ to 410,  Junk bond funds had limited buying & Treasuries saw heavy buying on recession fears (more below).  Oil was up 2+ to the 107s & gold gave back another 2 to 1804.

AMJ (Alerian MLP index tracking fund)

 

 

 




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The Federal Reserve's key real-time model for tracking US economic activity has turned negative, signaling that the nation could already have entered a recession.  The GDPNow gauge, a widely watched measurement from the Atlanta Federal Reserve Bank, indicated that real GDP shrank by 1.0% in Q2 from Apr thru Jun.  While the official advance estimate of Q2 performance will not be released for another month, this preliminary reading shows the 2nd qtr in a row of negative growth in the economy after GDP contracted 1.6% in Q1.  If further readings confirm that the economy did, indeed, shrink in Q2, the technical criteria for a recession – which is defined by 2 consecutive qtrs of negative growth – will be met.  However, the National Bureau of Economic Research (NBER) is the authority that makes the official   The forecast expected some economic slowdown from the interest rate hikes that the Fed implemented as it attempts to rein in inflation, which hit a 4-decade high in May.  Fed Chair Jerome Powell said Wed that there was some risk that policymakers might go too far in slowing economic growth, but that failing to bring inflation to heel represents a greater risk.  The GDPNow tracker already signaled earlier this month that the economy was headed for imminent recession when it showed 2 weeks ago that economic growth in the spring fell flat to 0%.

Key Fed GDP tracker has bad news for economy

General Motors (GM) warned investors that supply chain issues would materially impact its Q2 earnings, while maintaining its previous guidance for 2022.  The automaker expects net income during Q2 to be $1.6-1.9B & pre-tax adjusted EPSs to be $2.3-2.6B.  The forecast expected net income to be about $2.5B.  GM did not previously provide a forecast for its 2nd qtr.  The forecasts were part of a filing by the automaker disclosing that it has about 95K vehicles in its inventory that were manufactured without certain components as of Jun 30, a majority of which were built in Jun.  GM said it expects that “substantially all of these vehicles” will be completed & sold to dealers before the end of 2022.  Despite the issues, GM stood by its previously announced guidance for 2022, that includes net income of $9.6-11.2B, pre-tax adjusted earnings of $13-15B (EPS of $6.50-7.50) & adjusted automotive free cash flow guidance range of $7-9B.  The filing was released ahead of GM reporting its Q2 US sales, which were down 15.4% from a year ago.  The stock went up 22¢.
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GM’s quarterly sales fall but show improvement from beginning of year

Treasury yields fell as recession fears & disappointing economic data left investors looking for safety.  The yield on the benchmark 10-year Treasury note traded lower by 14 basis points at 2.827%, near its lowest level since late May & the yield on the 30-year Treasury bond slid 7 basis points to 3.04%.  The 2-year Treasury rate, which is typically more sensitive to US monetary policy changes, was down 9 basis points at 2.7%.  Yields move inversely to prices.  Yields extended losses after the ISM manufacturing index came in at 53, slightly below the of 54.3.  That data set came in a day after the gov reported that the core personal consumption expenditures price index, the Fed's preferred inflation measure, rose 4.7% in May.  That's 0.2 percentage points less than the month before, but still around levels last seen in the 1980s.  The index was expected to show a year-over-year increase of 4.8% for May.

10-year Treasury yield falls lowest level since May

The downward revision for GDP was not a great surprise considering the negative news on GDP growth in recent weeks.  If there is a recession the data will show to be a small one, assuming it does not worsen significantly in Q3.

Dow Jones Industrials

 






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