Markets moved lower this week as speculative investments, including SpaceX and AI-related semiconductor stocks came under significant selling pressure. The Model Fund Portfolio, however, faired significantly better due to its focus on defensive sectors and areas of the market with appealing valuations.
MACROECONOMIC UPDATE
- The National Federation of Independent Businesses (NFIB) Small Business Optimism Index ticked up from 95.3 to 97.4 but the Index remains below its historical average of 98.0. Small business owners continue to grapple with uncertainty and persistently high costs.
- Consumer Sentiment rose in the preliminary July reading, increasing from 49.5 to 54.4. Despite this jump, it remains near the lowest level in history as consumers remain concerned about high prices.
- The Consumer Price Index (CPI) showed a slowdown in inflation as the year-over-year rate moved down from 4.2% to 3.5% and the Core rate, which excludes the volatile food and energy components, ticked down from 2.9% to 2.6%.
- The Producer Price Index (PPI) echoed the message from CPI as the year-over-year rate fell from 6% to 5.5%. Core, however, ticked up from 4.6% to 4.7%. The downward moves in inflation were largely driven by a decline in energy prices. However, as oil price volatility continues, the inflation battle remains far from over.
- The National Association of Home Builders (NAHB) Housing Market Index fell from 36 to 34 as 37% of builders cut prices with an average reduction of -6%. A reading below 50 indicates widespread pessimism among builders regarding the current and near-term outlook for housing.
- After falling significantly last month, Housing Starts rose +19%. Even with this rebound, however, Starts remain within the range of the last few years. On the other hand, Building Permits fell -3%, trending lower to the bottom part of their range of the last few years.
- The Pending Home Sales Index for existing homes fell -5.4%, remaining near the lowest level in history. Currently the housing market appears to be treading water as it remains unable to break out from historically low activity.
TECHNICAL UPDATE
- Margin Debt shot up to a new all-time high in its latest release, warning of extreme investor enthusiasm and leverage (see Market Insight). Please Note: This data point came out just after the July issue of InvesTech was sent to print.
- The InvesTechAI Index declined throughout the week as AI-related stocks came under pressure. This Index continues to be critical to watch. If it falls below recent lows, it will indicate that investor psychology regarding AI is breaking down. This could quickly spread to a sell-off in the broader market.
INVESTECH MODEL FUND PORTFOLIO
There are no changes to the Model Fund Portfolio this week, which is comprised of 56.5% long positions, 5% in an inverse index ETF, 5% in an intermediate Treasury ETF, and 33.5% cash held in short-term Treasurys or a money market fund. This results in 51.5% net equity exposure.
Latest issue of InvesTech Research out later today!
While the SpaceX IPO launch has already fallen back to Earth, volatility is heating up across the market. And there is damage under the surface as more than half the stocks in the Nasdaq-100 are in bear market territory. So, in the latest issue of InvesTech Research we reveal the historic extremes present today – and the ominous parallels with the past, take a deep dive on the AI leverage and private credit market risk, and we examine the dichotomy in this stock market’s tug-of-war.