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Market Commentary for the week ending August 28th, 2021
- Everything was higher helped by the vaccine approval and steady Fed policy.
- Investors showed an appetite for risk with small stocks and emerging markets jumping.
- The rate of inflation reached a 30-year high but investors seem unconcerned.
This Week’s Performance Highlights
Federal Reserve Chairman Powell indicated in a speech Friday that the Fed is sticking to its plan to possibly reduce its asset buying of $120 billion per month late this year and not consider any interest rate hikes until sometime next year. This news combined with the FDA’s approval of Pfizer’s COVID vaccine apparently provided encouragement to investors with nearly every asset class we monitor moving higher for the week.
- At the close the week, U.S. large stocks as measured by the S&P 500 were higher by +1.6%. The Dow Industrials lagged behind gaining just +1.0% while the tech-heavy NASDAQ outperformed with a gain of +2.8%. Year-to-date the S&P 500 is still outpacing the NASDAQ.
- In an illustration of investors’ appetite for risk this week, small U.S. stocks surged higher by a very strong +5.1% helped by stocks in the energy and finance sectors. This brings the year-to-date gain for small stocks to +15.9%.
Gambling stocks were among the best performers for the week as illustrated in the accompanying table. These big gains came on the heels of some big deals being done in the industry, the continued growth of online gambling, and news that a closely followed stock picker added to her holdings.
- International markets were all higher as well with developed markets gaining +1.6% helped by outsized gains in both Australia and Japan.
- Emerging markets, in another sign of investors’ willingness to take on risk, jumped +4.2% led by Brazil and Thailand up +6.1% and +6.9% respectively. China’s markets posted gains as well up +3.8% but are still down for the year by -13.3%.
- Commodity prices surged +7.5% after having lagged behind for several weeks although they did not reach their recent highs. Gold had a good showing up +2.1% while real estate lagged up just +0.7%.
- Bond prices were nearly flat for the week leaving the yield on the benchmark 10-Year U.S. Treasury at 1.314%.
It’s been a strong and extended run for stocks now 287 days having passed since experiencing a -5% correction. During the last 100 years, there have been 65 corrections of -5% or more with an average of 120 days between each. Today’s run of 287 days is obviously more than double the average. Furthermore, the length of time between corrections has only exceeded today’s length 6 other times with the longest being 574 days from July 2016 to February 2018. Let’s see how long this one can last!
The price of lumber has been among the most volatile since the start of the pandemic as demand immediately dried up then surged as the housing boom took off. During the first 6 weeks it fell -43% to a low of $260 then began climbing higher and accelerated in early 2021 hitting a record high of $1,671 in May, a +540% gain from the low. As illustrated in the accompanying graph, it has since retreated and is now higher by just +12.5% from its pre-pandemic price.
New Home Sales: 708,000
Sales of new homes came in a bit stronger than economists had expected at an annualized rate of 708,000 after having fallen for 3 consecutive months. Buyers do not yet seem to be fazed by the ever increasing prices with the median hitting a new record of $390,500. Regional results were mixed with sales off somewhat sharply in both the Northeast and Midwest while the West gained +14% and the South ticked higher by +1.3%.
The inventory of new homes increased as well in July up +5.5% compared to the prior month and up +26% from a year ago. There is now 6.2 months of supply representing the highest level since April of last year. As the accompanying graph shows, the months supply of homes has rounded quickly from its 50-year low last fall and is now back to its long-term average.
Existing Home Sales: 5.99 million
Existing home sales were also higher in July up +2.0% from the month before and +1.5% over the year-ago numbers. The median home price is up +17.8% over the same period last year to $359,900 but is below the record high set last month. Regionally sales were flat in the Northeast and marginally higher throughout the rest of the nation.
Similar to new homes, the inventory of homes for sale increased in July over the prior month but, unlike new homes, still remains below the long-term average. Regardless, this tick higher in inventories is a sign that the flood of demand resulting from the pandemic could be subsiding.
Durable Goods Orders: -0.1%
Orders for durable goods, items lasting more than a year, dipped -0.1% but when excluding volatile transportation-related items including airplanes, orders were high by a relatively strong +0.7%. Demand for goods is appearing to remain strong in spite of the spreading of the COVID variant and a shortage of supplies and labor.
A few highlights in the report include a -50% drop in orders for airplanes, a number that is always lumpy especially during the summer months, +5.8% increase in orders for autos, and a -8.0% decline for nondefense capital goods.
Core PCE Price Index: +0.3%
Although the Consumer Price Index (CPI) seems to be the most closely watched indicator of inflation, it is said that the Federal Reserve’s preferred measure is the Core Personal Consumption Expenditure (PCE) Price Index. In July the Core PCE Price Index was higher by another +0.3% bringing the year-over-year rate to a 30-year high of +3.6% as the accompanying graph illustrates.
The debate around inflation rages on with the Federal Reserve continuing to say it expects it to return to normal, near the Fed’s target of 2%, as the economy normalizes and the shortage of labor and supplies eases. Investors seem to generally agree with stocks continuing to rise and bond yields remaining relatively low. If the Fed gets this wrong and inflation persists, it could dampen economic growth for an extended period of time.
Upcoming Economic Reports
- Employment Report
- Case-Shiller Home Price Index
- ISM Manufacturing Index
- Motor Vehicle Sales
- Factory Orders
- Initial Jobless Claims
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