This week we closed the books on the second quarter, and it was a challenging one. Stocks faced a number of headwinds: The S&P 500 lost 16.4%, with roughly half of that decline occurring last month, while the Nasdaq Composite fell 8.7%, leaving it down 22.4%.
While all of the major market indexes pushed higher on Friday afternoon, for the week in full they were once again down across the board, despite ending the first day of July on a positive note. We'll get into our big moves for the quarter -- hits and misses -- below, but let's say for now that trading volume for news-of-the-day stocks on Friday like Apple ( AAPL) , Applied Materials ( AMAT) , Micron ( MU) , and Taiwan Semiconductor ( TSM)  were near average levels. But the vast majority of stocks saw reduced trading volumes. Typically, when we see moves like those on Friday on low volumes, it raises questions about the strength of the move and whether it will be sustained after the weekend. To be blunt, the only thing that changed this week was the economic data we received, and the sharp guidance cut by Micron, neither of which suggests much of an improvement in the near-term.

With a number of headwinds for stocks persisting into the new quarter, concerns for the June quarter earnings season and the risk of further expectations resetting to the downside as we are still in a bear market, we will continue to tread carefully with the portfolio in the coming days.

The AAP Portfolio

We are in a bear market, and in a bear market nothing goes untouched.

As the quarter unfolded and fresh data landed, we updated our expectations and adjusted to the evolving market. Some of those actions were better timed than others. The net effect is a different looking basket of companies compared to earlier in the year, with fewer growth names and more defensive, inelastic business models and dividend payers. Some of the positions we left behind during the quarter were well timed, such as the ones in Honeywell (HON) , AbbVie (ABBV) , Boeing (BA) , Marvell Technology (MRVL) , and Norton LifeLock (NLOK) as well as our timely reduction in Nucor (NUE)  shares near $173. And while we should have moved sooner on the shares of Skyworks (SWKS)  and Airbnb (ABNB) , those shares are meaningfully lower than when we eventually exited them.

While those moves built up the portfolio's cash position, as the signs grew clearer for the Fed's likely path to beat back inflation and the prospects for an increasingly strapped consumer emerged, we added positions in McCormick & Co. (MKC) , American Water Works (AWK) , PepsiCo (PEP)  and more recently Verizon (VZ) . We also added to existing positions in ChargePoint (CHPT) and United Rentals (URI) at prices that moved the portfolio's average cost basis lower as the spigot for infrastructure spending started to open. We expect that activity to increase as we move through the current quarter and into the last one for 2022.

Given the market volatility and the prospect it will remain with us through the summer we also added to the portfolio's holding in Cboe Global Markets (CBOE) . Ongoing headlines proving that ransomware continues to explode led us to build up our position size in the First Trust Nasdaq Cybersecurity ETF (CIBR) , as well. And our concerns about the overall market led us to first call back ProShares Short S&P 500 (SH) shares into the portfolio to once again serve as a market hedge. And we later added to that stance with the addition of ProShares Short QQQ (PSQ) , an inverse exchange-traded fund for the Nasdaq 100.

On Friday we cut back the portfolio's position in Apple (AAPL)  following Micron's comments about the smartphone market and reports that Taiwan Semiconductor (TSM) is receiving order cancellations and pushouts. Those same comments from Micron reinforced our concern about the June-quarter earnings season and the likelihood that we see expectations for the second half of 2022 come down.

Reinforcing that view was Friday's updated Atlanta Fed GDPNow forecast for the June quarter that came in at a 2.1% contraction vs. its negative 1.0% view. We still have our concern about the self-fulfilling nature that follows a technical recession, should that be what the forthcoming revisions point to. Typically, it likely means consumer, as well as business, spending is curtailed, leading to another headwind for the economy.

Those two worries will see us prudently deploy cash in the very near-term and keep our two inverse ETFs in play as we move through the next few weeks and have a more defined view on to what degree expectations will be reset for the second half of the year.

Key Global Economic Readings

(Note: T is the most recent period, T-1 is the prior period's reading and T-2 is two periods back, the intent being to illustrate any trends)


We had several pieces of economic data for May -- and even for June -- hit this week. The net effect of those reports led to two downward revisions in the Atlanta Fed's GDPNow model for the June quarter. The first revision came on Thursday, with the May Personal Income & Spending Report falling to -1.0% from the prior reading of 0.7%. Following Friday's May Construction Spending data and the June ISM Manufacturing Index, that model was revised to -2.1% for the June quarter.

To give members a sense as to how quickly the landscape has changed, on May 17 the Atlanta Fed's GDPNow model called for 2.5% GDP growth for the June quarter. Both the hard economic data as well as other data have pointed to a sharp downturn in economic activity with both the June ISM Manufacturing Report and the S&P Global June Manufacturing PMI both showing new order contractions for the first time in roughly two years and weakening new export order data. Both reports also pointed to continuing inflation pressures:

"Input costs and output charges continued to rise at substantial rates amid marked increases in supplier prices. Alongside hikes in material costs, firms noted that greater fuel and transportation charges pushed up operating expenses. The rate of input cost inflation was the slowest for three months, however. Output charge inflation also moderated. That said, firms reiterated the need to pass- through higher costs to their clients through greater selling prices."

That paired with the still elevated May PCE Price Index data we discussed with members on Thursday will keep the Fed on its interest rate hike path in the coming months. The May PCE Price Index also confirmed what many have felt that consumers have been paying more for less.

Pulling our view out, Friday's JPMorgan Global Manufacturing PMI for June hit a 22-month low of 52.2, down a tick from 52.3 in May but so far still above the expansion-contraction line at is 50. On a positive note, global manufacturing production increased for the first time in three months during June given the rebound in China. But the report echoed the weak new order growth we discussed above with new orders hitting a standstill at the end of the second quarter of 2022. In terms of inflation, the JP Morgan found that on a global basis "weaker increases in input costs, output prices and supplier delivery times indicated that the pressure on these factors was passed its peak."

The wording in that last sentence is key -- "weaker increases" and "passed its peak" are encouraging, but they aren't the same as inflationary pressures are falling or returning closer to the Fed's stated target. This likely locks the expected rate hike at the Fed's July monetary policy meeting, but with a few months of data to go it will be the evolution in the expected rate hike for the September meeting that will be increasingly scrutinized.

To us this means, we are likely to see the market continue to move back and forth between inflation vs. recession concerns. Growth stocks will likely remain challenged in that context while more defensive ones continue to garner investor favor. Should the narrative tip increasingly toward to one of recession, a risk we've shared with members as talking heads discuss GDP forecasts for the June quarter, we are likely to see that pivot accelerate. For us, it means remaining on the cautious path we've been on with the portfolio's cash and keeping the portfolio's inverse ETFs in play as the shifting market narrative will likely to be reflected when companies update their guidance for 2H 2022.

Chart of the Week: Transports Really Need to Get Moving

With so much hanging in the balance here with the stock market, we are constantly looking for leadership. That is often found in the transport index, which does the leading -- in both directions.
The weekly chart here shows an arc-shaped formation and with lower-highs and lower-lows there is more downside here to come. Money flow is poor while the relative strength index is bending lower at a steep slope, which means there is more downside to come.
Notice the heavy volume in the blue box, too, that is a sign of institutional distribution. There are some targets to the downside, $200 is the "round number" target, while $170 and $150 are firm on the exchange-traded fund for the transports, iShares US Transportation fund ( IYT) . If the index flattens out though and just stops going down, there might be something to work with for the bulls. 

The Coming Week

As we move deeper into the start of the new quarter, we have another compressed week with U.S. equity markets closed on Monday for the Independence Day holiday. We wish you, your family, friends and loved ones a wonderful time.

With the books shut on the June quarter, we are officially in the "quiet period" for those companies whose quarter ended late last week. On the one hand it more than likely means a relatively quiet week of company news flow, it also means if we're apt to see a pick-up in earnings pre-announcements it will likely be next week or very shortly thereafter. While earnings reports will trickle in, July 14, looks to be the day when things really get going with earnings from Conagra, Ericsson, JPMorgan Chase (JPM) , Morgan Stanley (MS)  and Taiwan Semiconductor. Soon thereafter, the typical earnings season frenetic pace ensues.

The earnings reports as well as those for the global economy received in the last few days have sketched out what will more than likely hear in the coming weeks, but we'll make sure to fill in that sketch as more information becomes available. We continue to have concerns about expectations for the S&P 500 basket of companies for the second half of 2022, which were reinforced by Micron's revenue guidance for the current quarter that not only fell well below consensus expectations but was below its August 2021 quarter.

As we look to fill in the rest of the June economic data to get an even clearer sense as to how likely the Atlanta Fed's GDPNow model is, we have several key data points next week. Among the ones we'll be watching closely are the June Services data to see how if new order data matched the contraction reported in both the ISM and S&P Global June Manufacturing reports. All of that will keep the inflation vs. recession narrative going while we wait for the Fed's June Federal Open Market Committee meeting minutes and eventually the June employment report. As each of these and other data points land next week, investors, traders and others will be toggling back and forth between the CME FedWatch Tool and the Atlanta Fed's GPDNow model.

To prep us for the June jobs report and, given the rising number of layoffs we've been reading about, we'll be checking in on the latest Challenger Job Cuts report. As it pertains to our position in AMN Healthcare (AMN) , the May JOLTS report will offer a view on how quickly the demand for contract healthcare workers is normalizing.

Here's a closer look at the economic data coming at us next week:


Tuesday, July 5

  • Factory Orders - May (10:00 AM ET)
  • Total Vehicle Sales - June

Wednesday, July 6

  • Weekly MBA Mortgage Applications (7:00 AM ET)
  • S&P Global Services PMI (Final) - June (9:45 AM ET)
  • ISM Non-Manufacturing Index - June (10:00 AM ET)
  • JOLTS Report - May (10:00 AM ET)
  • FOMC Meeting Minutes - June (2 PM ET)

Thursday, July 7

  • Challenger Job Cuts - June (7:30 AM ET)
  • Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
  • Import/Export - May (8:30 AM ET)
  • Weekly EIA Natural Gas Inventories (10:30 AM ET)
  • Weekly EIA Crude Oil Inventories (11:00 AM ET)

Friday, July 8

  • Employment Report - June (8:30 AM ET)
  • Consumer Credit - May (3 PM ET)


Monday, July 4

  • Germany: Imports/Exports - May
  • Eurozone: Producer Price Index - May
  • Eurozone: Sentix Investor Confidence - July

Tuesday, July 5

  • Japan: Jibun Services PMI (Final) - June
  • China: Caixin Services PMI (Final)- June
  • Eurozone: S&P Global Services PMI (Final) - June
  • UK: S&P Gobal/CIPS Services PMI (Final) - June

Wednesday, July 6

  • Germany: Factory Orders - May
  • Eurozone: Retail Sales - May

Thursday, July 7

  • Japan: Leading Indicators - May
  • Germany: Industrial Production - May

Friday, July 8

  • Japan: Household Spending - May
  • Japan: Economy Watcher Current Index - June
  • China: Inflation Rate and Producer Price Index - June

Here's a closer look at the earnings reports coming at us next week. While it's a relatively thin week, comments on demand and input costs will be what we be assessing.

Wednesday, July 6

  • Open: Shaw Communications (SJR)

Thursday, July 7

  • Open: Helen of Troy (HELE)
  • Close: Levi Strauss (LEVI), PriceSmart (PSMT), WD-40 (WDFC)

Friday, July 8

  • Open: Greenbrier (GBX)