July’s headlines were again familiar ones – concern over the spread of the new coronavirus variant (“Delta”), the debate over “peak growth” (have we hit it?), rumors of a potential shift in the Federal Reserve’s easy money policies (maybe), and a continued crackdown by the Chinese government on large technology companies (definitely). For a brief moment inflation took center stage as readings on both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in hot, but this was quickly shrugged off.
There was something else familiar about July: stocks rose for the sixth straight month, with the S&P 500 climbing 2.3%, the Dow Jones 1.3%, and the Nasdaq 1.2%. That’s not to say there weren’t moments of volatility, however. Case in point: on July 19, the S&P 500 had its biggest drop since October, down -1.6%. That was followed on July 20 by the biggest jump in nearly four months, with the index up 1.5%. (Source: WSJ.com; 7/20/21)
To the extent that near-term market moves are reflective of investor sentiment, this should not have been surprising. There remains a high level of uncertainty as to the pace of future growth and continued debate over lofty equity market valuations, and that can be seen in the data – the good / less good trend continued – and in the behavior of the indexes. On the good side, the Bureau of Labor Statistics reported that nonfarm payrolls rose by 850,000 in June, a solid number. The unemployment rate rose to 5.9% from 5.8% as more people came into the labor force.
On the less good side, new jobless claims, which had been declining, suddenly jumped, going from a low of 364,000 in the last week of June (reported on July 1) then rising again to 424,000 for the week ending July 17. Home prices went up, but new home sales declined. The S&P CoreLogic Case-Shiller National Home Price Index rose at an annualized rate of 16.6% in May, while pending year-over-year sales of existing homes fell by -1.9% in June, according to data from the National Association of Realtors.
This pattern continued throughout the month, keeping things exciting. And so while markets did indeed move up, they did so fitfully.
Peak growth?
Gross domestic product (GDP) grew at 6.5% in 2Q; impressive, but well below expectations of 8% or more. Much of this shortfall was attributed to a decline in inventories and continued supply chain problems. Presumably, it will be made up in future quarters. Still, overall GDP pushed past pre-pandemic levels, to better than $22.7 trillion on an annualized basis, indicative of the overall speed of the economic recovery. (Source: BEA.gov/news; 7/29/21)
Is this the top? For what it’s worth, the Atlanta Fed’s GDP Now currently projects 3Q growth at 6.3%, down from 2Q but not by much. Next year is another matter. There is optimism – in a July survey, the National Association of Business Economists found that 86% of respondents expected GDP to climb more than 3% – but expectations are clearly more modest. (Source: USNews.com, 7/26/21) Markets will have to navigate this downshift over the coming months.
For those who needed reminding that governments can still matter, exhibit A was China’s crackdown on internet education companies and other tech-focused high flyers. This resulted in what Bloomberg called a “$1 trillion reckoning” as many of these stocks sold off and introduced a new level of uncertainty to investing in the country. (Source: Bloomberg, 8/1/21)
In the U.S., the Biden Administration rolled out a new directive it said was intended to promote more competitive markets. Industries that will potentially be impacted include everything from technology and healthcare to shipping and agriculture. More a “roadmap than a mandate,” as The Wall Street Journal characterized it, the order nonetheless provides some insight into how the Biden team views the current business landscape. Markets will be watching.
Q2 earnings generally came in strong, as expected. With 59% of S&P companies reporting as of July 30, 88% of those surprised to the upside in both earnings and revenue, according to FactSet. But that is quickly becoming yesterday’s news; investors are already starting to shift the focus to 3Q. FactSet reports that estimates are rising there, too, with the median projection for S&P 500 companies up 3.6% in July. This is counter trend; more typically, says the research firm, analysts reduce earnings estimates during the first month of the quarter. (Source: FactSet, 7/30/2021)
One last item of note, this one again courtesy of Bloomberg. The news service reported that the real yield on the 10-year treasury reached -1.13%, presenting a further challenge for fixed income investors. (Source: Bloomberg, 7/26/21)
Will August see a continuation of such fitful moves from the markets? Signs point to yes.