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Market Commentary for the week ending July 23rd, 2021
- U.S. stocks start the week lower then rally for multiple days to record highs.
- China’s market hits a 2021 new low continuing its decade-long poor performance.
- The housing market remains strong but momentum may be slowing.
This Week’s Performance Highlights
Stocks started the week sharply lower on fears of the COVID variant spreading and the potential impact on the economy and growth. But after Monday’s widespread losses, investor optimism quickly returned driving stocks higher for 4 consecutive days to all-time record highs.
- At the close of the week, large U.S. stocks as measured by the S&P 500 were higher by +2.0% while the Dow Industrials lagged but were still up +1.1%. The big winner was the NASDAQ jumping +2.8% as investors embrace big tech stocks.
- Small U.S. stocks outperformed by a small margin up +2.1% for the week but still lag large stocks year-to-date up +12.4% compared to large stocks’ gain of +18.5%.
- International stocks were mixed with developed markets up +1.2%. The Eurozone posted the biggest gains nearly equal to those of U.S. stocks while Japan and Australia lagged behind.
- Emerging markets were down an average of -2.0% impacted by losses in several markets including China, Brazil, and Thailand.
- China’s market has been among the worst performers in 2021 down -7.9%. There are many theories and explanations for this poor performance but the simple fact is that it is not uncommon for their stock market to lag behind. The accompanying graph shows that over the past 10 years Chinese stocks are roughly unchanged while the U.S. market has gained +232%.
- The performance of the alternative assets all fell short of stocks’ gains this week. Real estate stocks and commodities were both higher, up +0.4% and +0.9% respectively, while gold fell -0.5% as inflation fears appear to continue to ease.
- Bond prices inched higher once again by +0.2% pushing yields further down. The benchmark 10-Year U.S. Treasury dropped to a recent low yield of 1.194% when stocks dropped Monday but then moved back higher the remainder of the week to close at 1.276%.
Growth Leads Value Again
Growth stocks, those companies that are experiencing faster growing sales and earnings, had a strong week gaining +3.3% while more conservative value stocks were up just +1.0%. This week’s performance puts growth stocks once again ahead of value stocks for 2021 as the accompanying graph illustrates (the green line exceeding the blue line on the far right). For most of the year, value stocks had been performing better, and by a wide margin, with some market watches suggesting the tide may finally be turning.
It’s been a fairly long drought for value stocks as the below graph shows. Since the market low in early 2009 at the start of the massive bull market run, value stocks are up a cumulative +365% while growth stocks have more than doubled that return gaining +832%. You can see that during roughly the first half of the bull market, the two groups of stocks performed very similarly then in 2015 growth started to pull ahead and has yet to look back.
History suggests that periods of outperformance like we have seen from growth stocks often revert back to the long term averages meaning the value could outperform growth sometime in the future. Predicting when this will happen is nearly impossible though. Based on valuations, such as a stocks price relative to it earnings, growth stocks are about as expensive as they have ever been relative to the average stock while value stocks are very inexpensive (State Street SPDR ETFs Chart Pack July 2021 Edition). Only time will tell if and when this performance cycle shifts.
Following Facebook’s (FB) gain of +8.4% for the week, its total market value topped $1 trillion for the first time putting it in an elite club with Apple (AAPL), Microsoft (MSFT), Google’s Alphabet (GOOG), and Amazon (AMZN). In spite of the political pressure coming from both sides of the aisle and various investigations, Facebook continues to grow revenue as illustrated in the accompanying graph. The company reports second quarter results this week (the green bar in the graph is the quarter’s estimated revenue growth compared to last year).
The number of new homes under construction came in at an annualized rate of 1.64 million up +6.3% from the prior month. There was not strength across over region with starts actually falling in the Northeast and Midwest with all of the growth in the South and West. Demand is expected to remain strong but builders are struggling with supply constraints and a labor shortage.
Existing Home Sales climbed +1.4% in June but came in shy of economists’ expectations at a rate of 5.86 million home annually. More people are listing their homes for sale, helping to improve inventories, motivated by the record high median home price of $363,300. The still relatively low inventory of homes for sales is expected to keep prices firm but it is unlikely prices will rise at the same pace as the last 12 months gain of +23.4%.
The below graph shows an index of residential property prices adjusted for inflation (the blue line). As you can see, the surge in prices the last 12 months has extended a continued trend that started in 2012. Although prices are climbing, they remain below the peak in 2006 during the housing bubble and are below a longer term trend line (the orange line) going back to the ‘70’s.
Initial jobless claims disappointed rising to 419,000 in the most recent week coming in far above economists’ forecast of 348,000 impact somewhat by the temporary shutdown of automobile manufacturing plants due to parts shortages. On the positive side the total number of people receiving claims continue to drop falling to 3.24 million from 3.27 million the week before.
Upcoming Economic Reports
- Gross Domestic Product
- New Home Sales
- Durable Goods Orders
- S&P Case-Shiller Home Price Index
- Consumer Confidence Index
- Initial Jobless Claims
- Consumer Sentiment Index