Markets were mostly lower last week as investors reacted to increasing cases of the Delta variant of Covid along with comments from the Fed regarding rising inflation and potential bond purchase tapering.
For the week, the DJIA declined 0.52% while the S&P 500 lost 0.96%. The tech-heavy Nasdaq could not escape the selling and finished the week down 1.87%. International markets finished in the green. For the week, the All Country World Index ex-USA finished higher by 0.06% while emerging market equities (MSCI EM) rose 1.66%. Small company stocks, represented by the Russell 2000, were pummeled as they dropped 5.12%. Fixed income, represented by the Bloomberg/Barclays Aggregate, advanced 0.24% for the week as yields moved lower. As a result, the 10 YR US Treasury closed at a yield of 1.31% (down ~6 bps from the previous week’s closing yield of ~1.37%). Gold prices closed at $1,814.50/oz – up 0.25% on the week. Oil prices declined 3.69% on the week to close at $71.81 per barrel.
All eyes will be on earnings reports and news about the Delta variant this week. We expect earnings to continue to be strong. On the other hand, investors may pare back on cyclically oriented companies as the Delta variant calls into question the durability of the economic recovery. Consumer are still in great shape with healthy balance sheets and pent up demand.
Markets are entering a seasonally weak period so don’t be surprised by increased volatility. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. Enjoy the summer!
“Life consists not in holding good cards but in playing those you hold well.” – Josh Billings
During the short week of July 4th, interest rates moved lower, unsettling the financial markets. Investors debated the benefits of lower rates for financial assets versus whether the declining rates spelled a weakening of global economic growth. The spread of the highly transmissible delta variant of the coronavirus is also of grave concern.
For the week, US equities prevailed as the DJIA increased 0.25%, the S&P 500 was up 0.42% (an all-time high) and the tech-heavy NASDAQ rose 0.43%. International equity markets were under a little pressure. Developed markets (EAFE) declined 0.07%, while emerging markets (EM) dropped 2.58% as a result of China’s crackdown on Big Tech monopolistic practices. Small U.S. stocks, represented by the Russell 2000 finished in the red by 1.11%. Gold prices closed at $1,806/oz. and the price of oil finished at $74.63, hitting a six year high after OPEC+ was unable to agree to further production increases.
Surprisingly, the U.S. 10-year Treasury is now at its lowest yield since February, dropping 7bps from the prior week to 1.36%. Lower rates have and will continue to benefit more growth oriented companies. The fear of more than transitory inflation has subsided at least for now.
On the economic front, weekly unemployment claims came in higher than expected. Also, both the Institute for Supply Management (ISM) service sector numbers for June and the Economic Index came in lower than expected. Mortgage application activity in the U.S. was at its lowest level since January of last year, despite rates continuing to trend lower with 30-year average fixed mortgage rates hovering near 3%.
This week all eyes will be on second quarter earnings announcements. Second quarter corporate earnings for the S&P 500 companies are expected to have improved by nearly two thirds over the same period a year ago. On Tuesday, June consumer inflation (CPI) will add insight as to how transitory inflation is. Retail sales for June will be announced on Friday.
“Underlying most arguments against the free market is a lack of belief in freedom itself.”
-Milton Friedman
Equity markets climbed their way to all-time highs again last week. While investors anxiously wait on second quarter earnings announcements, economic data continues to confirm an improving economic landscape.
For the week, the DJIA advanced 1.03% while the S&P 500 gained 1.71%. The tech-heavy Nasdaq increased 1.96%. Small company stocks, represented by the Russell 2000, finished lower by 1.18% for the week. International markets also disappointed last week as the MSCI EAFE index (developed markets) closed lower by 1.09% while emerging market equities (MSCI EM) slipped 1.63%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher as yields declined. As a result, the 10 YR US Treasury closed at a yield of 1.44% (down ~10 bps from the previous week’s closing yield of ~1.54%). Gold prices closed at $1,786/oz. – up 0.50% on the week. Oil prices closed at $75.16/bbl. nearing a three-year high.
Economic news released last week came in better than expected. The big news came on Friday when the Labor Department reported that 850,000 jobs were added in June – surpassing estimates for a gain of 706,000 jobs. The unemployment rate increased slightly to 5.9% as more people than anticipated entered the workforce. The labor market remains extremely tight as there are more job openings than unemployed people looking for work. The Institute of Supply Management (ISM) reported their PMI for June at 60.6%, marking the 13th straight month of expansion in the manufacturing sector and economy overall. The National Association of Realtors reported that Pending Home Sales in May rebounded 8.0%, much stronger than estimates of a 1.0% decline.
Economic and market fundamentals remain quite reasonable as we closed out the 1st half of 2021. Although we are concerned about the new delta variant spreading around the globe, vaccines have proven to be mostly effective against Covid-19 and its variants. Markets will focus their attention on Q2 earnings, details of the infrastructure plan and the massive partisan reconciliation bill that Congress is debating. Of course, the burden will fall to taxpayers with corporate and capital gains taxes expected to increase from their current levels.
Most importantly, we wish our clients and friends a happy Fourth of July as we remain grateful for the many blessings bestowed on our great country.
“We must be free not because we claim freedom, but because we practice it.” – William Faulker
ND&S Weekly Commentary 7.26.21 – Markets Recover to New Highs
July 26, 2021
Markets were on edge last Monday as concerns about the highly contagious Covid-19 Delta variant concerned investors world-wide. However, the declines were short-lived and markets quickly recovered to hit all-time highs by Friday as solid corporate earnings were reported.
The DJIA finished above 35000 for the first time for a weekly gain of 1.12%. The S&P 500 and Nasdaq finished in the green with gains of 1.97% and 2.84%, respectively. Small company stocks, represented by the Russell 2000, rebounded 2.15% last week. Developed international (MSCI EAFE) managed a modest gain of 0.21%. After threatening many of China’s top technology companies in recent weeks and months, Chinese regulators took aim at the fast growing education sector last week. As a result, emerging markets (MSCI EM) were under pressure and fell 2.08%. Fixed income prices, represented by the Bloomberg/Barclays Aggregate, advanced 0.19% as yields moved fractionally lower. As a result, the 10 YR US Treasury closed 1 basis point lower at a yield of 1.30%. Gold prices closed at $1,800/oz. – down 0.72% on the week and oil prices increased 0.71% to $72.02 per barrel.
The housing market continues to chug along as housing starts increased 6.3% in June well ahead of consensus. Housing starts are up 29.1% from a year ago. The IHS Markit Group reported their U.S. composite PMI output index for manufacturing and services. The manufacturing PMI registered a series high reading of 63.1% exceeding consensus of 62.0%. The services PMI came in at a respectable 59.8% but missed estimates of 64.5%. In the week ahead, there will be a reports of 2nd Quarter GDP and personal income.
Earnings season continued last week and results have been coming in ahead of analyst estimates. So far, 86% of companies have reported an earnings-per-share (EPS) beat while revenues were slightly below expectations. Earnings for the S&P 500 are up 117.2% from a year ago while revenues increased 19.6%. The markets will be put to the test this week as large US growth companies report: UPS, Apple, Google, Microsoft, Facebook, and Amazon among others.
We expect company results to be quite strong this week. Markets will be looking for catalysts to continue their momentum. With major indices surpassing all-time highs, Wall Street analysts are only expecting modest gains for the remainder of the year. We recommend staying close to your long-term target asset allocations with a slight defensive bias. Have a great week!
“The most important thing in the Olympic Games is not winning but taking part; the essential thing in life is not conquering but fighting well.” – Pierre de Coubertin