Investors Optimistic About the Economy and Future Earnings Growth

As was the case last week, the deluge of economic data continues in the week ahead. But first, a look back at what was learned last week. The U.S. economy grew at an inflation-adjusted annualized rate of 6.5 percent in the second quarter. That came as a mild disappointment, but only in comparison to the 8.5 percent pace that had been expected. Growth was held back by a reduction in inventories, the trade imbalance, residential construction, and government spending, as evidence of supply-side constraints were evident in the data. A degree of moderation was also seen in the June durable goods report. Nevertheless, excluding last year’s second quarter, it was the fastest growth since the third quarter of 2003. And it followed the strong 6.3 percent pace of the first quarter. Consumer spending was particularly strong, especially in the services category as the economy continued to reopen. 

Markets Move Beyond Two Temporary Scares – Can the Momentum Last?

A three-day losing streak, and a drop in four out of five trading days in the S&P 500® index through last Monday pulled the index lower by 2.9 percent from what had been a record high of 4,384. The drawdown, widely attributed to concerns related to the Delta variant of the coronavirus, took the index within a half percent of its 50-day moving average, a key measure of near-term support. But that support held, as it has repeatedly this year, and just as quickly the index reversed course, rallying 3.6 percent over the final four days to end the week at another record high at 4,411. 

Earnings Season is Kicking into High Gear, What’s Next?

The first week of earnings season was dominated by better-than-expected results from the major banks, pushing the second quarter year-over-year anticipated growth rate to 69 percent, according to Factset. There was some weakness in lending, but capital markets activity was generally strong. And, of course, the release of loan loss reserves helped. Nevertheless, the BKX bank ETF fell 2.4 percent, contributing to an overall decline of 1.0 percent in the S&P 500® index. It was the third straight week of declines for the banks, and fifth week in the past six. From its peak on June 1, the BKX is lower by 9.9 percent. The banks were exceeded on the downside last week by energy stocks, which fell almost 8 percent. Consumer discretionary and materials were lower as well. Defensive groups were higher, including utilities, consumer staples, along with real estate.

The Bond Market Flashes Warning Signs

Stocks continue to reach record highs, and credit spreads are at record lows. It would seem that, at least for investors in these two asset categories, the economic, profit, and policy outlook could hardly be more favorable. And yet, in the past two weeks Treasury bond yields have recently fallen sharply, defying expectations, and sending investors in search of an explanation. 

The OPEC+ Standoff Fuels Inflation Concerns

The June jobs report showed further progress in the ongoing repair of the labor market, as the economy added 850,000 new non-farm jobs. It was the strongest month of job creation since last August and followed two months of disappointing results. But the report also showed evidence of the continued friction in the labor market that is keeping job gains from being even stronger. Rather than falling, the unemployment rate edged higher to 5.9 percent, and rather than rising, the labor force participation rate was unchanged. On balance, the report qualifies as progress, but not the substantial further progress the Fed wants to see before shifting policy. As a result, on balance the report will likely be viewed as market friendly. 

Equities Reach New Highs on Economic Momentum

U.S. equities continued their surge higher, gaining 2.7 percent last week to close at another record high of 4128 on the S&P 500 Index. That brought the year-to-date rise to 9.9 percent, with almost 4 percent coming just since the start of April. Further evidence of gathering economic momentum came in the form of the ISM services sector report’s rise to a record high. The minutes from the Fed’s March meeting also provided some reassurance that monetary policy is likely to remain on hold for some time. Bond yields also contributed to the positive tone by easing slightly, as the ten-year yield fell 4 basis points to 1.66 percent. That is down from its recent peak of 1.74 at the end of March. High yield spreads also narrowed to their tightest in over two years last week. The dollar eased, and the VIX index declined to its lowest level in over a year.

Investors React to a Series of Changes from the New Administration

U.S. equities resumed their winning ways last week after a one-week hiatus, as the S&P 500® index gained 1.9 percent. Most of that gain came on Inauguration Day, after which the rally petered out as the new administration began to settle in. The index is now higher on the year by 2.3 percent. Both the dollar and the ten-year note yield were little changed on the week.