Welcome to my video presentation for Monday, July 10. The article below is a condensed transcript; my video contains additional details and several charts.

After a robust first half to 2023, the equity markets fell during the first week of the third quarter.

During the July Fourth-shortened week, Wall Street was beset by renewed fears of inflation and prolonged hawkishness by the Federal Reserve. Odds are increasing that the Fed will hike rates again at its next policy-making meeting in late July.

The equity rally took a breather, largely because of surprisingly strong employment and services data.

For the week, the Dow Jones Industrial Average fell 2%, the S&P 500 fell 1.2%, and the technology-heavy NASDAQ fell 0.9%. The 10-year Treasury yield climbed to 4.06%. Crude oil prices jumped 4.3% for the week, as OPEC+ continues to tighten the spigot.

That said, the bull case remains in place. Long-term investors are in a marathon, not a sprint.

On Monday, the main U.S. equity indices snapped their losing streak and closed higher, as follows:

• DJIA: +0.62%
• S&P 500: +0.24%
• NASDAQ: +0.18%
• Russell 2000: +1.64%

The resilience of the jobs market and the services sectors means that a recession probably isn’t in the cards.

The S&P 500 index continues to hover above its 50- and 200-day moving averages. Moving averages identify the trend in the movement of a stock or index to determine support and resistance levels.

The New York Stock Exchange Advance/Decline line (NYAD) also hovers above its 50- and 200-day moving averages. The NYAD shows how many stocks are advancing versus declining in any given period on the New York Stock Exchange. A rising NYAD is bullish, because it denotes improving market breadth (see my video for the corresponding technical charts).

Despite losing steam last week, the stock market rally doesn’t seem to be in serious jeopardy.

To be sure, it’s worrisome that the CBOE Volatility Index (VIX) has edged higher in recent days, but it’s still lower by over 25% year-to-date. On Monday, the VIX jumped by 1.55% to close at about 15, well below the threshold of 20.

A stronger-than-expected U.S. ADP private-payrolls report released last Thursday drove bond yields higher, as inflation worries returned.

The private payrolls increase for June well exceeded consensus expectations, adding 497,000 jobs compared to forecasts for 225,000 jobs added. This is the highest level in over one year.

But the ADP data was mitigated by a report released last Friday by the Bureau of Labor Statistics, which showed that the U.S. economy added 209,000 jobs last month, and the unemployment rate edged down to 3.6% from 3.7%.

June’s total as reported by the BLS was lower than May’s unexpectedly robust showing of 306,000 jobs, and below consensus expectations for a net gain of 225,000 jobs. It was the lowest monthly gain in jobs since a decline in December 2020. Inflation fighters were pleased, but so were those worried about a recession.

Amid these contradictory crosscurrents, the U.S. economy continues to hold its own. The latest Institute for Supply Management (ISM) data, released last Thursday, continue to show relative strength in services sectors, compared to a contraction in manufacturing.

The ISM Services Index for the month of June came in at 53.9, versus an expected 51.2 and above last month’s 50.3 reading. Readings over 50 indicate expansion.

Among the 18 services sectors, 15 expanded in June, including lodging and food services, and entertainment and recreation, building the case for an ongoing demand for services. At the same time, the ISM manufacturing component continues to show weakness. Keep in mind, though, that services account for over 75% of the overall U.S. economy.

In the bond market, Treasury yields have climbed higher, as expectations grow that the Fed won’t pause its tightening cycle again this month.

Both the 10-year and 2-year yields have moved toward their highs of 2023, with the 10-year above 4% and the 2-year near 5%. This trend has weighed on bond prices, as well as on growth-oriented equity sectors that are sensitive to interest rates.

The week ahead…

The following economic reports, scheduled for release in the coming days, bear especially close scrutiny:

Wholesale inventories (Monday); NFIB optimism index (Tuesday); consumer price index and Fed Beige book (Wednesday); initial jobless claims, producer price index (Thursday); consumer sentiment (Friday).

The big news this week will be the two inflation reports, which analysts expect to show a further cooling of prices. Despite last week’s decline in equities, I’m still convinced that we’re laying the foundation for a sustained market recovery in the latter half of 2023.

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John Persinos is the editorial director of Investing Daily.

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