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.