(Above: you can hear an audio clip of this week’s report)
The ongoing arm-wrestling match between demand and supply remained pretty much at standstill last week as winds from different directions buffeted a low volume market.
From the positive side, earnings continued to impress both in the US and particularly in Europe where vaccination rates and productivity are on a sharp rise and the European Stoxx 600 index has now caught up with and passed the performance of the Dow Jones Industrial Average for 2021. The trillion dollar infrastructure bill which includes $550 billion in new spending on the nation’s highways, railways, and broadband rollout got through the Senate. Inflation showed signs of cooling off despite no change in the year-on-year number of 5.4% by reporting a relatively mild 0.3% July rise in the core index, which strips out food and energy. We also learned that, despite there being 8.7m unemployed in the US, there are more than 10m job openings.
It was also pointed out that with these recent stellar company earnings, the conventional narrative argument that the US market is severely overvalued, at least from a Price/Earnings (P/E) ratio perspective, is becoming less convincing as the S&P 500 index is up about 19% this year while earnings of the companies that comprise that index are up about 44% over the same time period. Earnings season moves into a new phase in the US next week, with a focus on retail and chipmakers like Home Depot, Target, Walmart, Cisco, Applied Materials and Nvidia.
There was, however, ammo for the Debbie-downers too - a quite terrifying climate report issued early in the week was described by a senior UN official as "a death knell for coal and fossil fuels". Energy stocks fell hard and the sector was the worst performer of the week. Also, consumer sentiment has absolutely fallen off a cliff in the last month, dropping 13% to below its previous low in the darkest days of the pandemic in April 2020. The University of Michigan, which produces the regular study, called it "a stunning loss of confidence" on the part of the American consumer. Growing concern about the economic effect of COVID variants and the increasingly disturbing low number of new vaccinations and corresponding high infection rates in the US is blamed for this sudden pessimism.
While the increase in the rate of retail inflation has showed signs of slowing, the measure of wholesale inflation paid by businesses, known as the Producer Price Index (PPI), seen by some as a kind of leading indicator to the Consumer Price Index (CPI) inflation, spiked 1% in July and the year-on-year rate is now a breathtaking 7.8%.
Federal Reserve presidents were out there yapping contradictory information about when the slowdown in bond market assistance and a rise in interest rates will begin and the markets don't like it when there appears to be trouble in paradise at the Fed. There's a definite desire for them to get their act together and come out with some kind of uniform message.
All this "push-me/pull-you" mostly cancelled itself out and although the S&P 500 did eek out another record close on Friday (that's almost 50 new all-time highs in 2021 already!), it was on the back of the smallest of improvements in demand over supply, certainly not at the level required to begin to fully repair the "under-the-hood" damage suffered by the broad markets over the last four or five months. Consequently, we are really no nearer to figuring out who will eventually win the market's current arm-wrestling contest, so caution remains warranted.
Relatively speaking ..
- The S&P 500 again outperformed the tech-heavy NASDAQ-100
- A good week for international developed markets (bolstered by Europe - see above) which won out ahead of US markets and the current perennial loser; emerging markets
- The small cap stock recovery stalled and large caps took over ahead of mid caps
- Growth stocks handily outperformed value stocks
- The week’s best performing US sector: Materials (two biggest holdings: Linde, Sherwin-Williams)
- The week’s worst performing US sector: Energy (two biggest holdings: Exxon, Chevron)
Technical corner ..
- The proprietary Lowry's measure for US Market Buying Power rose 1 point and that of US Market Selling Pressure fell 3 points
- SPY, the S&P 500 ETF, is still comfortably above both its 50-day and 200-day moving averages. It ended the week once again at yet another new all-time high
- QQQ, the NASDAQ-100 ETF, is still comfortably above both its 50-day and 200-day moving averages. It ended the week 0.23% below its all-time high set in July 2021
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across during the week.
This week: Why the strategy of connecting the dots between someone's complete guesswork about economics (your own or someone else’s) and deciding on your investment strategy is just plain foolishness.