Economic Update 8-02-2021
- Economic data for the week included Q2 GDP growth that came in robust, but below market expectations. Housing metrics were mixed, with strong prices but weaker sales. Consumer confidence continued to improve slightly.
- U.S. equity markets were mixed, as large caps lost ground but small caps gained. Foreign stocks were similarly mixed, with emerging markets were pulled down by volatility in certain Chinese sectors. Bonds gained slightly as interest rates continued to pull back. Commodities were helped from a weaker dollar, particularly in energy and industrial metals.
U.S. large cap stocks ended up slightly in the negative last week, while small caps gained. By sector, cyclical materials and energy led with gains of several percent, followed by financials, which also fared positively. On the negative side, consumer discretionary, communications, and technology lost ground to lead overall markets downward. The consumer discretionary sector was led by a drag in Amazon shares, which declined sharply as revenues fell below expectations, despite decent earnings results. Real estate gained slightly on the week.
It’s not overly surprising that financial markets fared positively with the late-week GDP growth disappointment—lower and peaking growth rates could mean a Fed keeping the gas pedal down for longer. On the positive side, per FactSet, nearly 90% of S&P 500 companies have reported an earnings and revenue surprise, with overall estimated index earnings growth for the quarter pegged at 63% on a year-over-year basis. Last week also saw the preliminary agreement on a Congressional infrastructure deal (a Senate vote to begin formal consideration of it). This most recent version is around $1 tril. in size, with half being set aside for public works projects. Roads/bridges represent the largest component (10%), and include power grid enhancements, broadband expansion, waterworks, and other segments. The understanding is that a far larger ‘social infrastructure’ bill is in the works to be attached to the scaled-back primary ‘regular’ infrastructure plan, led by Congressional Democrats.
Foreign stocks gained slightly in developed markets, helped a bit by a weaker U.S. dollar, as strength in Europe and the U.K. overshadowed a percent decline in Japan. As in recent weeks, stronger rates of economic and earnings recovery have been tempered with uncertainty about the severity of the Covid delta variant. However, growth remains far more subdued that than in the U.S., with Q2 eurozone GDP coming in at 2%, with inflation also far lower, at 2.2%.
Although most emerging market nations in the index earned positive returns for the week, the overall group lost ground due to a -5% drop in China, and to a latter extent, Brazil. Russian stocks moved in the opposite direction, gaining as their central bank raised interest rates by a percent in order to combat higher inflation. Various Chinese stocks were pummeled early in the week as popular technology names were down upwards of -10%. The catalyst was the Chinese communist government ordering Tencent to give up music licensing rights, in addition to crackdowns on other successful industries, including for-profit education/tutoring. In response, the latter fell over -50%, a few of which were popular among certain emerging markets funds, such as New Oriental Education. The targets appear to be any business that threatens the country’s priority of ‘social cohesion’, regardless of global market impact. This was combined with a breakdown in U.S.-China diplomatic talks last week surrounding several key disagreements.
U.S. bonds earned positive returns as interest rates ticked down across the treasury curve. Both treasuries and investment-grade corporates gained at roughly similar rates, while high yield and senior loans fell back. Foreign developed market and emerging market local bond markets both gained as the dollar declined.
Commodities gained with the help of a weaker dollar. All primary sectors saw gains, with energy and industrial metals providing leadership. The price of crude oil rose by over 2% to a few cents under $74/barrel while natural gas fell back at about the same rate, reversing a price spike from the prior week.
|
Period ending 7/30/2021 |
1 Week (%) |
YTD (%) |
|
DJIA |
-0.36 |
15.31 |
|
S&P 500 |
-0.35 |
17.99 |
|
NASDAQ |
-1.10 |
14.26 |
|
Russell 2000 |
0.76 |
13.29 |
|
MSCI-EAFE |
0.62 |
9.65 |
|
MSCI-EM |
-2.50 |
0.22 |
|
BBgBarc U.S. Aggregate |
0.25 |
-0.50 |
|
U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
|
12/31/2020 |
0.09 |
0.13 |
0.36 |
0.93 |
1.65 |
|
7/23/2021 |
0.05 |
0.22 |
0.72 |
1.30 |
1.92 |
|
7/30/2021 |
0.06 |
0.19 |
0.69 |
1.24 |
1.89 |
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT
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