Transcript:
Tom Vaughan:
I’d like to start off the show with a summary of kind of what I saw happening in the market this week. So what I have here, of course, is a chart of the S&P 500. Going back to the beginning of the year, and then the blue line that’s in there is the average for the 200 days prior. And you can see you know where that’s going. So altogether, obviously, the price is down, the 200, day moving average has started to come down. But if you look at this week, we’ve got quite a few little green boxes, they’re coming up, it’s actually been quite a good week with some, I think some interesting things that are happening. One of the things you do have to be careful about with this week is just that it’s a holiday shortened week. And often, volume is lighter. And so we might not really see, you know, trends that we want to pay that much attention to until maybe next week, we did see some lighter volume here. Because basically what happens in lighter volume is that you can get a smaller group that’s pushing the market one way or another as far as that goes. But we did have some interesting information come out this week. In terms of economic reports, we call this employment week. So earlier this week, they put out the unemployment first time unemployment claims, it was 235,000 people that applied for first time unemployment. Last week prior to that was 231,000. So it’s a little bit higher. It’s been coming up slowly, but surely over the last several weeks. But the expectation was actually that we would have 230,000 new filings, and the market actually went up, right. And this is the weird part about where we are right now in the market. So bad news, like higher unemployment can be good news to the stock market. And good news can be bad news. And the reason is, is because we’ve got this situation where the labor market, for example, is very tight, and inflation is very high. And so if the labor market softens up, where you have a scenario, you know, with more people unemployed, that actually could take some pressure off of inflation. And that could allow the Federal Reserve to become a little bit more accommodative. And the market would really like that, because right now, the Fed has been incredibly aggressive in their conversations about raising rates and what have you. Well, today, we kind of had the opposite report, we had the jobs report, which shows how many jobs were created in June, and it was 372,000 jobs, the expectation was 250,000 jobs.
So a lot more jobs are created than expected. Again, normally, this would be good news, in the sense that, you know, the economy is doing well, and things are picking up in this environment, it creates a tighter labor market. And that’s what the Fed is really one of the things they’re trying to focus on, there’s over 11 million open jobs, there’s almost two open jobs for every person looking for a job. And that creates a higher inflation on the wage, which eventually comes through higher inflation and price. And so that’s what the Fed is fighting really hard right now as far as that goes. And so I think what happened today will allow the Federal Reserve to be more on the side of doing another three quarter point increase. And we’ve seen some market movement towards maybe a half a point increase, but this labor report was pretty strong. So we’ll see how that plays out. Next week is a really big week, because that’s when the CPI, index comes out. If you look at this big, you know, waterfall have read that happened a few weeks back, that was the last time CPI came out. And so the the May inflation report that was reported June 17, came out higher than expected, and actually was the highest for the year, and 8.6%. So what will this week be? I actually think this week will be lower. Just because gas prices in June, were moderated. And maybe that actually is a catalyst to the upside. We’ll see what happens. And so again, bad news is good in this environment. So as things slow down, that’s what needs to happen here. The real question will be, does it slow down too much, right. And so that’s the big battle. There’s so many crosscurrents going on right now. It’s unbelievable, you know, things that are, you know, people look at this job report today. 372,000 jobs is that, oh, that’s a sign that we’re not in recession, and we’re not going to have a recession. Another group looks at that and says, Oh, my, you know, that means the Federal Reserve is going to do three quarter points.
And so we’re in this kind of environment right now, where things are turning around, and we’re basically trying to find direction, you know, between a healthy economy and a healthy inflation rate, and that’s a challenge. So at the moment, we’re of course, being more defensive this week. You know, it was a nice up week and what have you, but we still are at the same level we were at a few weeks ago and bouncing off of that overhead resistance and there’s some pieces that are out there, we’ll have to wait and see what happens. But again, for me, personally, I have three different methodologies of investing. One is an upward markets, which I have a definition for. And I’m basically trying to find the trends in those markets and ride those waves. And then we get a market like we’ve had so far this year, where the price is coming down, and what have you, but the indicators, the leading indicators for recession are still good are going up, then I’m doing kind of a high quality, highly diversified rebalancing concept. And then the strategy we’re in now is when the leading indicators are coming down.
So we have 200, day moving average coming down, the two that says S&P 500 is below that price. And the leading indicators are coming down. And so that, to me, is a defensive posture. And we move into a situation where we reduce some of our exposure to the stock market. And that’s where we’re at right now. And we’ll see how this, you know, run up plays out and what have you, did we actually establish you know, a few weeks ago, the low for the year, or are we going to go down lower and those types of things, I do think one of the biggest threats just to think about this has to do, of course, with the price of oil, because it’s a huge component of inflation. Almost everything that we buy and get delivered has some form of energy that is needed to get it to your door or make it and that’s gas and fuel and natural gas, oil, all these things. All obviously those have become more expensive since the invasion of Kuwait, sorry, Ukraine. And so but then we saw the price drop went from $130, a barrel at a high to this week went down to $95 a barrel. And so that is part of the reason why the market was moving quite well this week. But yesterday, Russia set up a situation where they essentially forced cause extend, to cut back their production, one and a half billion barrels a day. And we saw the price jump to a jump again, today, I think about an 8%. Last time I looked jump from that low point. And I think this is the biggest threat, Russia has this ability to weaponize oil by cutting back the delivery of that oil to Europe specifically. And that could drive price up dramatically. And if we’re all paying more for gas and for diesel, whether that’s shipping something across the oceans, or you know, just driving to work, that money is no longer being pushed into the normal economy. It’s all going into this energy sector, which is good for energy stocks, potentially, but not great for the economy. And it will cause high inflation, the Fed might respond negatively to that and lower rates even more aggressively, that could kick us into recession. So that’s something I saw this week that I thought was very important.
I don’t think it was reported that well. But it is I think one of the biggest threats as to what’s happening, perhaps if Russia cuts back, Saudi Arabia picks up the slack and increases their production. I’m not sure if that’s possible. But there are things that happen in the oil market that are very complex. So you know, we’ll see if this actually plays out, but a very high oil price at 162 50, whatever it might be, would be detrimental to the stock market, because it would be detrimental to earnings. And it would be detrimental because the Federal Reserve would probably continue to be aggressive in their lowering of rates, trying to drive down demand in general, in the hopes that that brings down the demand for energy. Right. So those are the things are kind of watching for right now. We’re, you know, sitting on this particular point, and we’ll see what happens. I do think next week will be very interesting. Do we break through this? We have now hit this level of resistance for the second time. And so the more you hit it, the more you dry it up, we could jump through this and go higher, or do we kind of fall back down?
Maybe the CPI report next week being better than expected or at least lower than may would cause a catalyst to get us through this resistant point and move us up. The next resistance point is that little grouping that we had about a month ago, you know, so that, you know, we’ll see how this plays out as far as that goes. A long ways to go here this year and see what happens but appreciate very much, you know, everybody spending some time listening to my summary this week, I really look forward to being able to talk to you again next week about kind of what I see happening out there. It’s a great time to be paying attention. There’s a lot to learn right now about the interrelationships that drives stock market gains, some of them aren’t that obvious where good news is bad news, etc. It’s really fascinating how every environment has its pieces, but the more you watch, the more you learn, the easier it is to kind of be at least calm during some of these downturns, if not being able to take advantage of them.