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Market Whiplash: When Good News Turns Bad

Subtitle: Plus: Wall Street vs. Outsiders, Hospital Stocks Surge, and ECB Rate Cut Likely

Josh Belanger

Jul 26

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TGIF! Is good news turning into bad news? For months, bad news was good news for the markets. But now, the tables seem to be turning.

Yesterday's GDP report showed growth at 2.8% versus the 2% consensus and 1.4% prior.

Before the market opened today, the PCE inflation report came in at 2.5% YoY, in line with estimates and the lowest reading since February 2021.

Despite the S&P 500 and Nasdaq getting hit hard in the previous two trading sessions, markets rallied off this economic news but will still close lower this week.

Is this the new normal?

Economic Juggling Act: Growth, Inflation, and Job Market Shifts

Why it matters: Recent economic data showcases a delicate balance of growth, inflation, and job market changes, influencing the Federal Reserve's upcoming decisions on interest rates and impacting overall market sentiment.

The Details:

GDP Growth: The U.S. economy grew at an annualized rate of 2.8% in Q2, surpassing the 2% forecast and significantly higher than the 1.4% growth in Q1. This robust growth is driven by strong consumer spending and business investment.
Inflation: The Fed's preferred inflation gauge, the core PCE index, rose by 0.2% from May and 2.6% year-over-year. This mild increase suggests that inflation is cooling, offering some relief from high prices.
Consumer Spending: Inflation-adjusted consumer spending increased by 0.2%, indicating that consumers continue to spend despite economic uncertainties.
Labor Market: The unemployment rate ticked up to 4.1%, the first rise above 4% since 2021. Job openings per unemployed person have returned to pre-pandemic levels, and hiring has slowed, signaling a cooling job market.

Zoom In: While GDP growth and consumer spending remain strong, the rising unemployment rate and cooling inflation create a complex scenario for the Fed. Economists expect the Fed to hold rates steady in the short term, with potential cuts in September if inflation continues to cool.

Big Picture: The U.S. economy is demonstrating resilience, leading advanced economies with projected growth. However, the mixed signals from GDP, inflation, and labor market data make future economic trends uncertain.

Bottom Line: The latest economic data highlights a juggling act for the U.S. economy. Strong GDP growth and cooling inflation are positive signs, but the rising unemployment rate and slowing job market indicate potential challenges ahead. The Fed's upcoming decisions on interest rates will be crucial in navigating this complex economic landscape.

Trump vs. Wall Street: The Outsiders' Play

Why it matters: Trump's campaign is changing alliances, putting outsiders against Wall Street, and shaking up the economy.

The Details:

Wall Street's Reaction: Trump's pick of JD Vance, who is against big corporations, and Biden's exit with Kamala Harris stepping in, have made Wall Street rethink their support. Vance’s words scare financiers, while Harris is seen as more moderate.
Energy Sector's Bet: Oil billionaires like Harold Hamm are heavily backing Trump. They hope he will favor fossil fuels and cut regulations to help their businesses.
Crypto Enthusiasts' Support: Trump’s acceptance of crypto donations has pulled in millions. Investors and industry leaders hope he will support digital money, which is different from his previous stance.

Zoom In: Trump’s support from oil tycoons and crypto fans, mixed with Vance’s anti-corporate stance, shows a plan to rally outsiders against Wall Street’s power.

Big Picture: These changes show the big money at stake in the election. Trump’s team of outsiders wants to challenge the old financial order, shaping future politics and economics.

Bottom Line: The shifting alliances from Wall Street, the energy sector, and the crypto community show the high stakes in the election. It’s setting the stage for a fight between old financial power and outsider interests.

Hospital Stocks Surge: Healthcare Sector on the Rise

Why it matters: After years of labor shortages, hospitals are bouncing back with strong demand and better staffing, leading to higher revenues and earnings. This is boosting their stocks, making them attractive investments.

The Details:

Tenet Healthcare: Tenet reported revenue of $5.1 billion for Q2, beating the $5 billion expected by analysts. Their adjusted earnings per share hit $2.31, higher than the predicted $1.90. They also raised their earnings outlook for the year. Even though they sold some hospitals, admissions in remaining ones rose 5.2% from last year.
HCA Healthcare: HCA also saw busier hospitals and increased their year-end earnings forecast. Their shares jumped over 5% after announcing their results, with more revenue coming from higher prices and increased patient demand.
Hiring Improvements: Both companies benefited from better hiring conditions. Hospitals added nearly 90,000 jobs this year, reducing the need for expensive temporary staff. This allowed them to reopen services closed during the pandemic.

Zoom In: Tenet and HCA are seeing a recovery in their hospital segments, thanks to a stronger labor market and higher prices negotiated with insurance companies. This has opened up more capacity to meet patient demand.

Big Picture: The hospital industry, hit hard by labor shortages during the pandemic, is now experiencing a rebound. Improved hiring and strong demand are driving better financial performance and optimistic forecasts for the future.

Bottom Line: Hospital stocks like Tenet (THC) and HCA are breaking out, making them strong plays in the healthcare sector.

Quick Sizzles

Debt-Ceiling Drama: Wall Street is preparing for the next US debt-ceiling standoff, analyzing the Treasury’s estimated cash balances to predict future bill supply.
Southwest Airlines Overhaul: Southwest Airlines will start assigning seats and offering extra legroom to attract more passengers and boost revenue, moving away from its long-standing open seating policy.
Uninsured Drivers Increase: More Americans are driving without car insurance, raising costs for everyone. The percentage of uninsured drivers rose to 14% in 2022, up from 11% in 2019.
Blurred Lines in Lending: The distinctions between traditional bank loans and private credit are blurring as direct lenders issue large loans and megabanks move into middle-market lending.
Elliott Targets Starbucks: Activist investor Elliott Investment Management has taken a big stake in Starbucks, pushing the company privately on ways to boost its stock price.
ECB Rate Cut Likely: ECB surveys show inflation and wage growth are on track, increasing the likelihood of a rate cut in September. Policymakers are confident that the biggest surge in consumer prices has been tamed.

Option Sizzle

Today's option volume of 48.8 million contracts was in line with recent average levels, with calls leading puts 11 to 9.

Here are stocks with notable unusual options activity:

Bullish on Wayfair (W): Wayfair saw bullish option flow with 5 times the expected volume.
Bearish on eBay (EBAY): eBay experienced bearish flow with 6 times the expected volume.
Bullish on CSX Corp (CSX): CSX Corp recorded bullish option flow with 2 times the expected volume

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