The market fell again this week, although not much, down by 0.45% in the US and 1.18% outside the US. High valuations, an economy that is still growing but slower than originally thought, inflation, proposed tax increases, and tapering around the corner have stalled the market out, at least for now. In what might be an ominous sign, the market did not hold support as we wrote about last week. Now stocks certainly didn’t collapse, but they finished the week just under the mid-August highs.
One problem is that producer prices (purple line below) have been rising much faster than consumer prices (orange line below), meaning that companies have not been able to pass on the rise in recent cost inputs. Should the higher inflation numbers turn out to be “temporary” than maybe the impact won’t be that bad, but if not, it will impact profits and growth.
Another issue is Evergrande, the huge Chinese property developer. With $300 billion in debt, the company is on the brink of default. For now, the Chinese government is playing hardball and has not indicated it will provide financial help, so there is the threat of a spillover into world financial markets.
US stocks were down by 1.83% and international equities were off by 0.80% for the week. Stocks closed at the low on Friday and are resting right on the support level from mid-August.
Damage from the Delta variant is starting to show up in the economy. Offices are delaying opening, businesses are pulling back on travel, and spend-happy consumers are slowing down. Hiring in August came in way less than expectations, and the University of Michigan consumer sentiment poll taken in late August fell to the lowest level in a decade.
The Atlanta Fed’s GDPNow model is currently estimating 3.7% growth down from 5.3% at the start of the month. Over the last week, economists across the board have cut their growth forecasts.
Delta gets most of the blame, but the ending of government aid also plays a part. A recent Census Bureau survey shows that 41% of households said they used some form of government assistance to help with everyday expenses.
At the same time that economists were cutting estimates, some analysts are becoming cautious on US equities. Bank of America is projecting 4260, that is 4.7% below the Friday close, and 4600 at the end of next year, up 3% for next year. Morgan Stanley moved US stocks to “underweight” with a preference for Japan and Europe, and an overweight in cash. “Morgan Stanley strategists forecast cash to outperform U.S. equities, government bonds and credit over the next 12 month”, said a note from the firm.
Stocks were up in the US by 0.67% and by 2.07% outside the US.
August jobs were up by 235,000 but that was dramatically below the 750,000 estimate, but the stock market didn’t care. The market will turn every piece of news, good or bad, into a reason to for stocks to go higher. However, the the Initial Jobless Claims report was good. Ithit a new pandemic low coming in at 340,000 for the week ending August 28th.
August closed out on Tuesday and stocks were up for the 7th straight month, the S&P was up by 2.4% while the Nasdaq increased by 4% for the month.
At least one area of irrational exuberance has cooled off. The SPAC market has lost $75 billion in market cap over the last six months. That is about 25% of the combined value of the 137 SPACs that merged by mid-February. During that same period, IPOs that came public were off about 12% while the Dow Jones Industrial Average was up 13%.
Home prices continued to hit records. The S&P CoreLogic Case-Shiller National Home Price Index rose 18.6% year over year in June, up from 16.8% the prior month, and the highest annual rate since the index began in 1987.
West Virginia Senator Joe Manchin wrote a good common-sense editorial on “Why I Won’t Support Another $3.5 trillion“. Manchin sites the risk of inflation, runaway debt, the future unknowns of the pandemic, the problems with artificial deadlines, and the impact on future generations.” Lets see if it makes any difference.
Fed officials are getting close on an agreement to begin a tapering program in a few months. An end-date hasn’t been set yet, but some Fed officials are pushing for mid-2022.
Businesses around the world are sitting on a stockpile of $6.84 trillion according to S&P Global. This is based on second-quarter earnings reports. That is up by 45% from five years ago and 2.6% greater than last quarter. Despite being flooded with cash, corporate spending is expected to decline by 5.8% this quarter, down from 12.9% last quarter. Many companies are holding on to cash until the virus clears. Part of the cash buildup was due to dividends cuts and cancelations of share-buyback programs. Then you have huge amounts of debt being raised to take advantage of low interest rates.
US stocks were up by 0.56% and international stocks increased by 0.81%. The US market closed at another high while international stocks are still off of their June highs.
Producer prices increased by 7.8% year over year in July, indicating that the “transitory” inflation is so far a bit more than the Fed ever expected. Meanwhile, the Senate is working on a $3.5 trillion package, at the same time they are getting closer to passing a $1 trillion infrastructure package, on top of all the trillions thrown in to the economy last year, and they wonder why prices are up?
Barry Knapp, director or research at Ironsides Macroeconomics, said in Barrons this weekend, “We have this setup now that is very similar to the 1960s, which led to the Great Inflation of the 1970s.”
There were more jobs available in the US in June than at anytime. Unfilled job openings increased by 590,000 in June to 10.1 million unfilled jobs. That exceeds the number of unemployed by more than 500,000.
An article in Bloomberg on Saturday says analysts are the most optimistic in two decades. About 56% of recommendations are buys, that is the most since 2002. This coming when markets are at all-time highs and valuation metrics are stretched.
Stocks rallied on Friday for another up week, closing at a new record, US markets were +0.96% and international equities were up by 0.80%. Bond fell by 0.43% on a strong employment report.
Nonfarm payrolls were up by 943,000 in July, the best gain in 11 months. The unemployment rate fell to 5.4% from 5.9% in June. 261,000 workers entered the labor force, another positive sign. The surveys were done before the big Delta variant surge started in mid-July, but they do indicate there was a lot of momentum in the economy going into it. The Delta surge though is starting to reach frightening levels in some areas. In Austin, Texas, a city of 2.4 million, there are just six ICU beds left as of this morning. On Saturday there were 102 people on ventilators compared to four on July 4th. The City’s health department asked residents to stay home and mask up even if they have had the vaccine. Houston, with a population of 6.7 million, had 41 ICU beds available. Florida posted a one-day record for Covid cases on back to back days, on both Friday and Saturday.
With the never-ending rally, some investors are starting to figure the bulk of the rally is in the past, but don’t expect a big market drop either, therefore moving into buy-write funds that tend to prosper in a go-nowhere market. The strategy attracted $1 billion in new inflows in July, the most since 2012, according to Barclays.
It was a somewhat flat week, stocks did hit a record on Thursday but a pullback dropped the US by 0.34% and international markets by 0.20%.
GDP grew at a 6.5% annual rate in the second quarter, up from 6.3% in the first quarter. The size of the economy is now greater than its pre-pandemic level. But while growth is expected to be maintained, the future is more cloudy as the Delta variant is spreading quickly, prompting the CDC to recommend wearing masks indoors.
Average home-prices increases set a record in May, up by 16.6% compared to last year, up from the 14.8% growth rate the prior month, as measured by the S&P CoreLogic Cash-Shiller National Home Price Index. The median home price in June was $363,300, up by 23.4%, according to the National Association of Realtors. These number make it even more absurd that the Fed continues to keep interest rates extra low by buying $120 billion a month in Treasurys and mortgage bonds.
The Fed did hint this week that those purchases would be evaluated soon, in a statement, the Fed said, “the economy has made progress towards these goals…[and would] assess progress in coming meetings.” But Powell made it clear that raising rates was not on the table, “It’s not something that is on our radar screen right now.”
A key inflation indicator eased slightly this week. Consumers surveyed by the University of Michigan expect inflation five to 10 years from now to be 2.9% down from 3% in May and closer to the 2.8% average in surveys from 2000 to 2019. And the recent fall in interest rates seems to indicate that bond investors are not worried either. However, on the other hand, inflation has been the big topic on earnings conference call. According to Bank of America Global Research, inflation was discussed at a rate 10x higher than last year.
The market fell hard on Monday, dropping over 2%, but after that the bulls took control. The market was up by 2.28% for the week and closed at another high. The Dow broke the 35,000 barrier. The market scare on Monday was due to fears of a spreading Covid Delta variant and its potential slowdown of the economy. The virus tripled in case count over the previous two weeks. The 10-year yield dropped to a stunning 1.13% yield.
But then the “buy the dip” investors got to work, investing about $7 billion in ETFs. That stock market rally coincided with the 10-year returning to where it closed the week before, at a 1.30% yield, just off by one basis point. Strong earnings also helped. 85% of the 110 companies that have reported earnings have beaten forecasts.
The IHS Markit US manufacturing purchasing managers index hit a record high, powered by a surge in new orders. On the job front, the reports were mixed. On one hand, the number of people receiving jobless payments hit a post-Covid low, but new applicants rose by 51,000. The increase in new applicants was blamed on the auto industry due to supply constraints, mainly chips.
The S&P 500 was up 1.1% for the week. On Thursday, the market had its biggest decline since June 18th, but the Friday rally put the market at another record close. Bond yields fell during the week. The 10-year treasury yield closed at 1.354% on Friday and got as low as 1.287% on Thursday, that was down from 1.434% last week.
Individual investors are “all-in” when it comes to investing in the stock market. According to Vanda Research, individual investors purchased $28 billion of stocks in June, the most since 2014. Investors also opened more than 10 million new accounts so far this year, about equal to what was opened in all of 2020, according to JMP Securities. But the enthusiasm is not equally shared with professional investors, who are still positive on the market for the most part, but uneasy with high valuations, the threat of inflation, and an eventual pullback by the Fed. While this bull market seems to have broken all the rules, in the past, mass participation by individual investors has sometimes signaled market tops.
Treasury yields tumbled to multi-month lows as Fed minutes indicated the Fed was in no rush to stop purchasing bonds and the fast-spreading Delta variant might slow down, at least to some degree, the fast improving economy. Notes released from a Federal Reserve meeting showed that some Fed officials were not as confident about the economic outlook and therefore want to maintain its massive purchases of government bonds. And an Israeli study showed that while the variant does provide a good level of protection against the variant, it is more like 65% than 95%.
The Labor Department reported on Wednesday that at the end of May there was 9.2 million job openings, the most ever. There are currently 9.3 million Americans unemployed that are actively seeking work.
President Biden issued an executive order to increase competition in the economy targeting agriculture, technology, and drugs. Biden said that “The heart of American capitalism is a simple idea: open and fair competition.” We actually agree with many parts of the Biden initiatives, over the last 30 years or so it has become harder and harder to start and grow a small business in the United States, hurting aspiring entrepreneurs, prospective employees, and consumers.
US stocks continued their march forward, closing at a new high on Friday, up 1.22% for the week. International stocks fell by 0.87%. The S&P 500 has set a new high for seven days in a row, the longest such streak since 1997, and it has gained more than 5% for for five quarters in a row, that was last done in 1954. Bonds rose by 0.57%.
Household wealth in the US increased by $13.5 trillion last year, a simply incredible number given that the economy was more or less shutdown at different points. A higher stock market drove half of the increase. One-third of the increase went to the top 1% and more than 70% went to the top 20% of income earners. Huge government benefits also drove the increase, especially for lower income workers. Higher prices for homes were also a factor.
In April, home prices increased by the fasted rate ever, up 14.6% year over year, as measured by the S&P CoreLogic Case-Shiller National Home Price Index. That was up from 13.3% the previous month. The index dates back to 1987. Exploding house prices makes it difficult for many to afford a home, especially first-time buyers. Not to mention, out of control prices for homes was a major factor leading to the 2007/08 collapse. Which makes one wonder why the Federal Reserve continues to buy $40 billion per month in mortgage securities while the economy is growing at a real rate of 7% and inflation is coming in at 4% plus.
Business added 850,000 jobs last month, better than the consensus estimate. Weekly jobless claims fell to a pandemic low last week, dropping to 364,000 down from 415,000 the prior week.
130 countries have agreed do a global minimum tax rate for international companies. The Biden administration pushed this plan. There will now be a 15% minimum tax rate in each country, thereby minimizing opportunities to avoid tax. It was the biggest change to international taxation rules in a century.