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By Ben Norris, Securities Research Analyst, Associate Vice President

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While markets are traditionally quiet during the summer, a relentless cycle of market-moving news has kept things interesting since June. Each day seems to bring new developments around the Federal Reserve’s next policy decision, the Delta variant of Covid, or now the collapse of the Afghan government. Some headlines are more relevant to markets than others but that doesn’t stop financial media from waxing on the latest reason to buy or sell stocks.

The major market indices were mixed last week with large-cap and value stocks outperforming growth and small-caps. The Dow Jones Industrial Average (DJIA) gained 0.94% last week while the S&P 500 (SPX) was up 0.75%. In contrast the technology-heavy NASDAQ Composite lost 0.07% and the small-cap focused Russell 2000 sank 1.07%. Stocks in the Materials, Financials, and Consumer Staples sectors outperformed while Energy, Real Estate, and Consumer Discretionary fared worse than the major averages. SPX and the DJIA both finished the week at all-time highs despite some market turmoil early in the week as strong corporate earnings helped investors justify pushing stocks higher. Nearly 460 of the 505 stocks in the S&P 500 had reported second-quarter earnings as of last week. Roughly 80% of those companies reported results that were better than Wall Street expectations, a very strong number by historic standards. In fact, year over year, revenues were up about 28%, while earnings were up an impressive 103%.

Stocks were down last Monday as Covid cases spiked to early 2021 levels as the Delta variant of the virus rages in communities with low vaccination rates. Tuesday brought better news as the U.S. Senate passed the bipartisan infrastructure bill and sent it to the House for markup. Stocks in the Materials and Energy sectors reacted particularly well on news of the bill’s passing. Wednesday brought an update on inflation in the form of the Consumer Price Index. July CPI came in right at expectations, showing that prices gained 5.4% year over year and 0.5% versus the prior month. A 5.4% gain in inflation is certainly high relative to recent standards, but investors were relieved that the monthly figure eased from the 0.9% gain seen from May to June. Thursday featured the normal update on jobless numbers, which showed initial jobless claims of 375,000 for the week prior, in line with expectations and near the lows of the pandemic. The week closed out on a somewhat sour note with consumer sentiment coming in far below consensus expectations. The most likely explanations for the shortfall are increased concerns about both higher inflation and surging Covid cases.

I want to circle back to the bipartisan infrastructure bill as I believe its potential passing could be the next major catalyst for stocks in 2021. The bill in its current form is set to create $1 trillion in spending focused on traditional infrastructure – roads, bridges, railways, waterways, etc. Passage of the spending plan is not guaranteed as some progressive lawmakers want to tie passage of this plan to a larger $3.5 trillion “social” infrastructure plan that would focus on human infrastructure – things such as universal pre-kindergarten education, paid sick leave, expanded access to healthcare, combatting climate change, etc. President Biden has made it clear that while human infrastructure spending is a priority, he does not want it to stand in the way of getting the traditional infrastructure plan signed into law. We tend to think that lawmakers will go along with his wishes.

Some of you may have watched the Major League Baseball game played between the New York Yankees and the Chicago White Sox in Dyersville, Iowa. The inspiration for a major sporting event to be played in rural Iowa comes from the movie Field of Dreams starring Kevin Costner and James Earl Jones. A quick synopsis of the movie – Kevin Costner’s character hears a voice coming from his corn field that repeats “if you build it, they will come.” He decides to tear up several acres of his family’s corn field to build a baseball diamond. Eventually the field attracts the ghosts of several baseball legends, including Shoeless Joe Jackson. The movie ends with hundreds of cars lined up to see his creation. The ghosts, and their fans, did come. The U.S. is in its own “if you build it, they will come” situation. Our country’s infrastructure needs a serious overhaul to remain globally competitive, and this spending plan has arrived just in time. The billions of dollars slated to address these problems should create opportunities for businesses and investors alike. If the plan gets passed this year, the investors will come.

The coming week features a variety of economic announcements worth keeping an eye on. The highlight of the week will be the release of the Federal Open Market Committee (FOMC) minutes on Wednesday. As always, housing and employment data will receive their fair share of attention as well.

Date Report Previous Consensus
Monday 8/16/2021 N/A
Tuesday 8/17/2021 NAHB Homebuilders Index

80

80

Retail Sales

+0.6%

-0.3%

Industrial Production

+0.4%

+0.5%

Capacity Utilization

75.4%

75.7%

Wednesday 8/18/2021 Building Permits

1.59M

1.61M

Housing Starts

1.64M

1.59M

Thursday 8/19/2021 Initial Jobless Claims

375,000

365,000

Continuing Jobless Claims

2.87M

Friday 8/20/2021 N/A

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.

August 17, 2021 |