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Market Commentary for the week ending July 30th, 2021
- Second quarter economic growth maintained its momentum but was below forecasts.
- Stocks were mixed and bond yields declined while all of the alternative assets gained.
- Earnings reports show the average S&P 500 company beating estimates by an average of 22%.
This Week’s Performance Highlights
Stocks closed the week mixed as investors digested the most earnings reports in a single week for this quarterly earnings season and were faced with multiple economic reports showing momentum may be slowing.
- At the close of the week, large U.S. stocks were lower by -0.3% as measured by the S&P 500 while the Dow was off just slightly more at -0.4% and the tech-heavy NASDAQ fell -1.1%. Small U.S. stocks recovered some of their recent losses gaining +0.7% and remain behind large stocks for the year by about -5%.
- Of the five stocks valued at a trillion dollars or more, Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon.com (AMZN), and Facebook (FB), Google’s parent Alphabet was the only one higher for the week.
- 172 of the 500 stocks in the S&P 500 reported quarterly earnings this week with the average company beating Wall Street estimates by +22% and growing revenue by +25% compared to the same period last year. The accompanying table highlights the companies reporting this week that saw the biggest moves in their stock prices.
- International stocks were mixed as well with developed countries up +0.3%. The Eurozone markets did better than average gaining +0.7% for the week helped by stocks in both France and Italy while Japan’s market fell -1.1%.
- Emerging markets were lower on average down -1.7% dragged down by a steep loss of -5.2% in China’s market. Beijing’s crackdown on its technology sector and other industries is causing historic declines in many stocks.
- The alternative asset classes were all higher for the week with Commodities leading the way up +1.6% as the price of oil climbed.Gold was up +0.8% but continues to be the laggard in 2021 down -4.8%.Real estate stocks gained +0.5% now up +29.2% for the year.
- Bond prices rose +0.3% continuing to push yields lower in a sign investors may be fearing an economic slowdown. The yield on the 10-Year U.S. Treasury is 1.228% just above its recent low but well below its March 31st high of 1.745%.
TAL Education Group (TAL), a leading K-12 after-school tutoring provider in China, has seen its stock drop -93% since mid-February just over 5 months ago. According to a variety of reports, the Chinese government has placed new restrictions on the industry banning these companies from raising capital from stock listings, not allowing foreign capital to invest, and requiring them to register as non-profit organizations. At the current price of $6.07, TAL has a value of $3.9 billion which is a bit surprising to me for a company that will now be a non-profit!
Robinhood (HOOD), a financial services platform with the very popular stock trading app, went public this week at a price of $38 per share. The stock disappointed investors buying at this opening price closing the week down -7.5% as compared to many hot new stocks often jumping in early trading. At the week’s closing price, the company is valued at $29.4 billion which is more than 5 times Interactive Brokers (IBKR), a competitive financial services firm, although Robinhood’s most recent quarterly revenue is about -25% less than Interactive Brokers’. This page provides a great summary of the company’s history, money raised, and other key statistics.
The U.S. economy, or Gross Domestic Product (GDP), grew by +6.5% in the most recent quarter following a +6.1% gain the prior quarter. Consumer spending was the main driver of this growth surging +11.8%, or roughly four times average growth, helped by consumers being flush with cash and record wealth as illustrated in the below graph. Although growth was very strong relative to normal it fell well short of economists’ estimates of +9.1%. Expectations for the rest of the year remain positive assuming the COVID variant is contained.
During the last 12 months, U.S. household wealth has increased by +23.0%. Since the early 1950’s, this is the fastest year-over-year growth in ever and by a wide margin. This arguably could continue to fuel a strong economy.
Durable Goods Orders, orders for such things as airplanes and other long-lasting items, continued higher in June up another +0.8%. This growth is certainly good news but it was less than half economists’ expectations and a sharp deceleration from the prior month’s +3.2% gain. Furthermore, excluding the volatile transportation sector, airplanes and automobiles, orders were higher by just +0.3%.
Despite the spread of the coronavirus delta variant, Consumer Confidence hit a 16-month high of 129.1 and is roughly back to levels pre-pandemic. Consumers feel good about current economic conditions, find jobs easy to get, and are worrying less about inflation. This month’s reading was just marginally higher than last month but well ahead of economists’ estimates that confidence would fall. Noteworthy is that two other separate surveys of consumers did show decreasing confidence.
High home prices and slim inventories are frustrating home buyers along with supply and labor constraints for builders all resulting in a surprise drop in new home sales to an annualized pace of 676,000. This was both down from the prior month, well below forecasts, and back roughly to the same pace pre-pandemic.
The S&P Case-Shiller Home Price Index, an index of home prices nationally, is up a record-setting +16.6% year-over-year as of May. Some of the hottest markets are Phoenix, San Diego, and Seattle. Tight inventories, low interest rates, and possibly some shifting locational preferences are helping fuel this rise. Economists expect prices to continue higher in the second half of 2021 but at a slower pace.
Upcoming Economic Reports
- Employment Report
- Factory Orders
- Motor Vehicle Sales
- ISM Manufacturing Index
- ISM Services Index
- Initial Jobless Claims
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