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Market Commentary for the week ending August 7th, 2021
- The economy added 945,000 new jobs in July exceeding expectations.
- Stocks were higher worldwide and bond yields jumped.
- 151 of the S&P 500 reported earnings on average well ahead of forecasts.
This Week’s Performance Highlights
Stocks were higher worldwide helped by strong earnings reports from many U.S. companies and multiple economic reports showing growth remains strong. Bond yields jumped, one sign of concerns about inflation, but nearly everything else, including lower gold prices, suggests otherwise.
- At the close of the week large U.S. stocks were higher by +0.9% as measured by the S&P 500 while the Dow Industrials gained just +0.8% and the tech-heavy NASDAQ outperformed up by +1.1%. Year-to-date the NASDAQ does trail the performance of the S&P 500 by 3%.
- Small U.S. stocks gained +1.1% for the week and are now up +5.5% in less than 3 weeks off their mid-July lows. Unlike large stocks that are at record highs, small stocks remain off their March 15th high by -4.7%.
- Earnings reports continued to pour in from corporate America with 151 of the S&P 500 companies reporting this week. On average these 151 companies beat Wall Street earnings expectations by +30% although their stocks rose just +1.1% on average this week in a possible sign that much of the good news is already priced into these stocks.
- International stocks gained as well with developed market stocks up +1.0% helped by the strong performance of Australian stocks gaining +2.2%. Emerging markets trailed but were still higher by +0.7% impacted by continued struggles in China’s market losing another -0.3% this week.
- Gold and Commodities both had a rough week down -3.1% and -3.5% respectively in a sign investors have little or no concern about future inflation. Real estate stocks inched higher by +0.4%.
- Bond prices dropped a relatively sharp -0.4% pushing the yield on the 10-Year U.S. Treasury to close at 1.303%. This is up sharply from the recent low yield of 1.175% hit earlier in the week. Expectations are growing that the Federal Reserve may raise interest rates sooner than had been expected given the economic strength.
The Consumer Prices Index (CPI), a measure of retail inflation, will be reported in the coming week for the month of July. This report from the U.S. Labor Department has indicated the cost of housing, in the report known as the “Shelter” component, has risen just +2.5% from January 2020 through April 2021. At the same time, two other sources show the price of homes up between +16% and +25% during the same period. Although the Shelter component of the CPI report is not just a measure of home prices, the cost of a home is among consumers biggest expenses and may not be fully reflected in this official government report on inflation.
The estate of Michael Jackson has been caught up in a court battle with the IRS regarding the valuation of the estate and resulting taxes owned. The difference in value places on the estate by Jackson’s estate and the IRS is $959 million! The challenge is that the assets are intangible such as his image and likeness. The Tax Court hearing the case handed the estate a victory recently valuing the estate at $111.5 million compared to the $961.7 million value the IRS was arguing.
New Jobs: +943,000
The monthly employment report showed the economy adding a better than expected 943,000 new jobs in July plus revisions higher for the two prior months by a combined 119,000 additional jobs. This was a bit better than economists had forecast and a good sign that the economy is continuing to power ahead while cases of the contagious delta variant rise.
The service sector was the biggest contributor to new jobs created accounting for 70% of the total added in the month as illustrated in the accompanying graph.A big part of these service-sector jobs are coming from the restaurant, hotel, and entertainment industries as people ramp up their travel and entertainment activities. Retail was the only sector down by just 5,500 jobs.
Unemployment Rate: 5.4%
The big addition of new jobs in July pushed the unemployment rate down by a big -0.5% to 5.4%. This is a new post-pandemic low but it is still well above the 3.5% in early 2020 with 5.7 million fewer people working. Those who are working are seeing their wages increase up another +0.4% in July and +4.0% over the past 12 months.
The outlook for the remainder of 2021 is mixed. The economy could continue to grow at a strong pace and more people may return to the job market once schools fully reopen. On the other side, the increasing number of COVID cases could slow down progress.
ISM Services Sector Index: 64.1%
A report from the Institute for Supply Management also showed the service sector continuing to grow and at a pace faster than expected with the index coming in at 64.1%. This is an improvement from last month’s 60.1% and meaningfully better than economists had expected. Any reading above 50% indicates growth.
Of the 17 industries included in this services sector report, all reported growth although many are being challenged by higher costs, supply constraints, and a lack of people willing to work. In spite of these challenges, this month’s report is one of the best since 1998 when the ISM began tracking data.
ISM Manufacturing Index: 59.5%
The manufacturing sector is also continuing to grow per the Institute for Supply Management’s monthly report. The index came in at 59.5%, although not as strong as the services sector but, again, any reading above 50% indicates growth. In a normal economic environment this would be a very strong month.
Similar to the services sector, manufacturers are struggling with shortages of both supplies and labor resulting in an inability to fill customer orders. Companies have been raising prices, among other things, to cope with the various issues but there are signs that some of these strains on businesses may be starting to ease.
Motor Vehicle Sales: 14.8 million
Cars and trucks sold at an annualized rate of 14.8 million in July. The pace has been slowing since the March high as illustrated in the accompanying graph. The slowdown is NOT from a lack of demand but instead a lack of supply as manufacturers have been unable to get computer chips and other parts.
Upcoming Economic Reports
- Consumer Price Index
- Producer Price Index
- Initial Jobless Claims