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By Jack Kraft, Advisor Directed Portfolio Analyst

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Wall Street had no shortage of market moving news last week with choppy trading whipsawing the major averages from positive to negative territory. Ultimately, stocks struggled to find direction despite a strong Monday session that pushed equity markets to record levels. Through Monday the S&P 500 had clocked its 39th all-time high on the year. This pace of record highs puts the broad index on course for its best run in 26 years, where the S&P 500 managed to record 64 separate all-time closing highs. As the week persisted, further gains proved difficult as risk sentiment faltered with updates on inflation and monetary policy outweighing upbeat corporate earnings reports.

All three major averages ended the week in negative territory with the Tech-heavy Nasdaq Composite leading the losses with a 1.9% decline. Meanwhile, the Dow managed to crack the 35,000 level twice during intra-day trading last week, but failed to close above it, ending the week off by 0.5%. The S&P 500 dropped 1.0% with energy stocks coming under pressure. In commodities, WTI crude posted its largest weekly loss since April amid increasing supply worries. Saudi Arabia and the United Arab Emirates (UAE) reached a preliminary compromise on production increases, paving a way for deadlocked OPEC+ negotiations to continue.

Let’s start with the “Good.” The world’s largest banks kicked off the unofficial start to earnings season with the takeaway being better-than-expected from the street. A highlight in bank earnings was a rebound in U.S. credit card spending reiterating a strong global recovery among consumers. Furthermore, issuers reported an accelerating trend past pre-pandemic levels that they expect to continue. In fact, the only category that has failed to fully rebound past 2019 levels is travel, according to Credit Suisse. With the first week of earnings season in the books, 85% of S&P 500 companies that have issued results have posted a positive EPS surprise, according to FactSet.

We find this as a bright spot among the vast amount of news hitting the tape last week. U.S. equities entered earnings season at record levels and the highest expectations since 2009. Analysts have been steadily increasing their expectations for the second quarter from 45% growth at the start of the year to now a 65% earnings growth on a year-over-year basis. Keep in mind that a 65% increase in the bottom line may sound colossal, but the Covid-19 pandemic peaked in the second quarter of 2019.

As for the “Bad,” a mixed batch of economic data seemed to weigh on equities, specifically inflation fears. First, a report on consumer price inflation (CPI) showed prices that everyday people pay at the register increased at the highest rate since 2008. The report did show evidence of transitory inflation with used car and truck prices accelerating more than 10% last month, bringing the total increase from one year ago to 45.2% for the group. Meanwhile, other prices tied to an economic reopening increased with the most notable being in airfares, food, and lodging. Elsewhere, producer price inflation (PPI) increased 1% from May and spiked 7.3% on a year-over-year basis. That marked the second consecutive month in which PPI set a record for the data series that goes back to 2010 and indicates further price pressures are in the pipeline. Shedding a bright spot on the economy was the labor market with weekly unemployment claims coming in-line with expectations and falling to a new pandemic-era low.

Markets continue to remain segmented as economic data has proven to be an influencer in the divergence between value versus growth stocks. Although it is rare that history repeats itself, it does tend to rhyme. And this environment rhymes with the financial markets of late 2018 to me (before the Fed tightened rates). During this period, it seemed that good economic data was bad news for stocks and vice versa. Except, this time around economic data that is showing a robust recovery is bad news for certain pockets of the market, such as growth and good news for other areas like value. Conversely, economic data associated with a slower economic growth has acted as a tailwind for growth and a headwind for its value counterpart.

Another major sticking point that garnered investors attention last week was the semi-annual congressional testimony by Fed Chair Jerome Powell, who spoke for two days on economic and monetary policy. Investors listened closely for any indication on when the Fed plans to taper asset purchases or raise rates. Currently, the Federal Reserve’s balance sheet has more than doubled from its pre-pandemic level of roughly $4 trillion to more than $8 trillion. Overall, Powell’s comments were perceived as “dovish” with inflation being the main talking point. Powell said he is confident that inflation will subside with price hikes associated with a reopening economy and that the central bank is monitoring inflation “night and day.” He went on to further reiterate that the main focus of the central bank was to reduce unemployment with no plans to taper bond purchases until “substantial further progress” is made in the labor market.

This week will feature a jam-packed slate of corporate earnings reports and economic data. Headlining the economic calendar will be separate flash reading on July services and manufacturing PMI, both of which are expected to slightly decline from the pervious month. Updates on the real estate market will also garner attention with data on housing starts and building permits for the month of June on Tuesday. Rounding out the docket, will be initial jobless claims which is expected to further decline. In central bank news, the Federal Reserve will enter into a quiet period ahead of its two-day FOMC meeting on July 27th and 28th. Across the pond, the European Central Bank (ECB) will hold its policy meeting Thursday. In sports, the 2021 Olympics will begin in Tokyo, Japan on Friday.

10:00 AM NAHB home builders’ index    July           81       81
8:30 AM Building permits (SAAR)    June    1.68 million     1.68       million
8:30 AM Housing starts (SAAR)    June    1.59 million     1.57    million
None scheduled
8:30 AM Initial jobless claims (regular state program)   17-Jul     348,000    360,000
8:30 AM Continuing jobless claims (regular state program)   10-Jul            —     3.24      million
10:00 AM Existing home sales (SAAR)    June   5.93 million     5.80 million
10:00 AM Index of leading economic indicators    June      0.90%    1.30%
9:45 AM Markit manufacturing PMI (flash)    July         61.8      62.1
9:45 AM Markit services PMI (flash)    July          64.3      64.6


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July 19, 2021 |