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Market Commentary for the week ending September 18th, 2021
- Stocks were mostly lower in spite of relatively strong economic data.
- Retail sales in August surprised to the upside as consumers continued to spend in spite of the delta wave.
- Inflation may have peaked with a second monthly report showing price gains slowing.
This Week’s Performance Highlights
- Stocks were mixed in the U.S. with large U.S. stocks down -0.6% as measured by the S&P 500. The Dow Industrials were off just -0.1% while the tech-heavy NASDAQ lost -0.5%. Small U.S. stocks though were able to post a gain of +0.4%.
- Energy stocks were just one of the three sectors higher for the week gaining +3.2% as the price of oil moved back above $70 per barrel closing the week at $71.96.
- International stocks did not fair as well as U.S. stocks with developed markets on average off -0.8%. The performance though among the various regions was mixed with the Eurozone off -1.2% while stocks in Japan rose +0.9%.
- The long-term performance of the Japanese stock market is a very interesting one as illustrated in the accompanying graph. Just last year the market broke above levels first reached more than 30 years ago while during the same time markets in most of rest of the world increased many multiples.
www.YCharts.com MSCI Japan index
- Emerging markets, impacted by steep losses in both Hong Kong and China, were down -2.1%. China’s business climate is being impacted by a variety of political initiates including the most recent news that could impact the gambling industry and the lucrative Macau casino market.
- Commodities, up +1.6%, were the best performer of the alternative assets fueled by the price of oil. The price of gold was off -2.0% and now lower by -8.2% in 2021 making it by far the worst performer of all the major asset classes we track. Real estate stocks added to last week’s sharp drop of -4.0% down another -0.5% this week but still higher for the year by +27.7%.
- Bond prices were unchanged on average for the week. The yield on the benchmark 10-Year U.S. Treasury was little changed closing the week at 1.371%.
The 500 stocks in the S&P 500 are expected to grow earnings per share by +56.2% from 2019, pre-pandemic levels, through 2022. This represents a +16.0% compounded annual growth rate as compared to earnings per share growing by just +5.9% annually for the 30 years ending in 2018. The acceleration in earnings growth is certainly helping stock prices. The question investors must always ask is whether or not these positive expectations are already fully reflected in today’s stock prices or if there is more upside ahead.
Source: 1988 – 2018: www.YCharts.com; 2022 estimate: https://advisorservices.schwab.com/content/market-perspective
Retail Sales: +0.7%
Consumers surprised economists in August as they ramped up spending once again with Retails Sales growing by +0.7% as compared to estimates that they would fall by the same amount. Furthermore, the month’s report represents a rebound from the prior month when sales fell -1.8%. The strength in the August report was in spite of the rampant spread of COVID and the reduction of some government stimulus.
Excluding a drop of -3.6% in auto sales due to supply constraints, retail sales were even more impressive gaining +1.8%. Internet retailers were among the strongest performers up +5.3% after falling in July. On the other hand, restaurant sales were flat but expected to resume growth as the current wave of COVID slows.
Consumer Price Index: +0.3%
Consumer prices, as measured by the Consumer Price Index (CPI), rose less than expected up just +0.3% in August and only +0.1% when factoring out volatile food and energy prices. The rising pace of prices has slowed from the peak a few months ago as illustrated in the accompanying graph although the year-over-year gain of +5.2% is still well above the Federal Reserve’s target of +2.0%. Assuming the current trends persists, the year-over-year rate will fall into a range closer to the Fed’s target.
Industrial Production: +0.4%
Industrial Production, a measure of output for manufacturers, mining, and utilities, grew +0.4% in August representing a slowdown from the +0.8% gain the month before. Estimates suggest growth would have been stronger by +0.3% had it not been for the storms that hit the United States. Although much of the economy is well ahead of pandemic levels, industrial production remains -2.5% below 2018 highs and just fractionally up from February 2020 just before the pandemic. A lack of supplies and shipping constraints are being blamed for this slow recovery.
Consumer Sentiment Index: 71.0
Although consumers are spending record amounts of money as discussed above, Consumer Sentiment, measured by the University of Michigan, is holding near 10-years lows with the reading coming in at 71.0. When drilling down into the various components of this survey, consumers’ views of current economic conditions are worse than at any point during the pandemic. Economists believe all of this will improve in the next reading if the retreat in delta cases continues.
Upcoming Economic Reports
- New Home Sales
- Existing Home Sales
- Leading Economic Indicators
- Markit Manufacturing PMI
- Markit Services PMI
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