This week's note offers important insight into what's developing at and below the surface... I.e., while our PWA Index shows real, and legitimate, signs of life, there remain underlying crosscurrents that to some extent muddy the overall go-forward macro setup.
As for the equity market, as I emphasized herein during the week, on the surface (the S&P 500) stocks ended up churning out a nice showing:
What Got Better, and What Didn't*
Our internal conditions gauge moved up meaningfully this week, breaking out of a five-week stretch in which it had essentially not moved at all. It was the largest one-week improvement we've recorded in some time.
I want to spend most of this space on why that number improved, because the composition matters more than the headline — and in this case the composition tells a more interesting story than the number does.
The gauge tracks a wide set of inputs across consumer conditions, business activity, the broad economy, inflation, commodities, and financial markets. When we look at where the improvement came from this week, nearly all of it came from two places: commodity prices and market internals. Prices came down across the board. Not one commodity input we track rose. Crude gave back several percent after a violent run, industrial metals eased, freight rates softened, agricultural prices fell back, and natural gas extended a decline that has now run five consecutive weeks and roughly fourteen percent on the month.
That is genuinely good news, and it is the main reason the gauge improved.
But the sections that measure the actual economy — consumer conditions and the broad economic aggregates — did not improve. Consumer conditions slipped, driven by a sharp drop in mortgage activity as the thirty-year rate reached its highest level in nearly a year. And the measure we watch for whether incoming data is beating or missing expectations broke sharply lower, on three consecutive misses including a second-quarter growth reading that came in well below what economists had forecast.
So the honest summary is this: the cost of things fell, and that's a real improvement. Activity did not accelerate. Those are different statements, and we try hard not to let the first one get reported as the second.
The Number That Surprised Me
The most striking data point of the week had nothing to do with markets. It was the final consumer sentiment survey for July.
Households were asked what they expect inflation to be over the coming year. Coming into this survey, there was a reasonable case that the answer would jump. Energy prices had risen more than twenty percent during the month. Mortgage rates had climbed. The conflict in the Middle East had intensified rather than resolved.
Instead, the one-year expectation came in lower than the prior month, and the longer-run expectation was unchanged for the third consecutive month. Neither number was revised at all from the preliminary reading — meaning the portion of the survey collected after the escalation looked no different from the portion collected before it.
That is a meaningful signal. It says households are treating this energy move as a shock to one category of prices rather than as the beginning of broad, persistent inflation. The bond and swap markets are pricing it the same way.
The Part I'm Watching
Here is where I want to be careful, because this is the piece that doesn't make the headlines.
Consumer spending held up well in the second quarter — it was the strongest contributor to growth. But look at how it was funded. The personal savings rate fell to its lowest level of this cycle. And after adjusting for inflation, private-sector wages are running slightly negative over the past year. Employment costs are rising around three and a half percent annually, which sounds healthy until you set it against inflation running above three percent.
In other words, spending held up because households saved less, not because they earned more in real terms.
That can continue for a while. It cannot continue indefinitely. And it means the reassuring inflation expectations we just discussed are, in a real sense, being purchased out of household balance sheets rather than earned through a genuine easing of price pressure.
I don't say that to be alarming. The labor market remains firm — weekly unemployment claims are near multi-decade lows — and business investment is running at its strongest pace in several years, particularly in technology infrastructure. Those are real supports. But the mechanism absorbing this energy shock is the consumer, and that's a mechanism with a limit.
What Our Gauge Cannot See
One last point, and it's the reason I wanted to write this note myself rather than let the number speak.
Our conditions gauge posted its best reading in a long while during the same week that long-term interest rates rose to their highest levels since 2007. Three members of the Federal Reserve's policy committee formally dissented in favor of raising rates — the most unified dissent of that kind in nearly a decade. Markets ended the week pricing meaningful odds of a rate increase in September.
Almost none of the inputs in our gauge measure the cost of borrowing directly. That's by design — it was built to read economic conditions, and it read them accurately this week. But it means the gauge is largely blind to what is currently the most active source of risk in the market.
So we're holding two things at once. Conditions in the real economy improved. The cost of capital deteriorated. Both are true, and portfolios have to be built for both — which is why our positioning continues to carry deliberately contradictory exposures rather than betting the whole book on one outcome.
Looking ahead, the first full week of August brings manufacturing and services activity readings, the July employment report, and — most importantly — the July inflation report in the middle of the month. That will be the first inflation reading to actually contain the energy move we saw this month. Until then, most of what we know about how this shock passes through is inference rather than evidence.
This commentary is provided for informational and educational purposes only and does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation regarding any security, sector, or investment strategy. The views expressed reflect the opinions of Private Wealth Advisors as of the date written and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Past performance is not indicative of future results, and all investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as personalized investment, tax, or legal advice.
*The section titled "What Got Better, and What Didn't" was drafted with the assistance of artificial intelligence tools under the direction and editorial review of Marty Mazorra, Chief Investment Officer of Private Wealth Advisors. All analysis, conclusions, and final content are his own.
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