The Race to Space
Corporate billionaires Jeff Bezos and Richard Branson both traveled to space (based upon their own respective views of how far into the atmosphere “space” actually begins) in a race to advance their respective projects to make commercial space travel a reality. Second quarter corporate earnings followed suit, blasting through incredibly high analyst expectations (65% on average before the first company reported and rising from there.) The overwhelming majority (88%) of the 295 companies that have reporting through July far exceeded those lofty expectations. The percentage of companies reporting a positive earnings surprise is the highest since Factset began tracking this metric in 2008. Of course, the starting point of the year-over-year comparisons is low due to weaker earnings in 2020 during the pandemic lockdown, but numerous companies providing pre-COVID earnings comparisons back to 2019 have shown impressive “normalized” earnings and revenue growth as well.
|Market Index Returns||July 2021||YTD 2021|
|S&P 500 Index||2.4%||18.0%|
|Russell 2000 Index||-3.6%||13.3%|
|MSCI EAFE Index||0.8%||9.6%|
|Barclays US Agg. Bond Index||1.1%||-0.5%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.0%|
Stock Market Review & Outlook
Equity Markets Continue to Set and Break Through New Record Highs
The S&P 500 added another 2.4% in the month to an 18% return for the year-to-date period through July. After blasting off the bottom of the pandemic lockdown, the index has vaulted, sprinted and hurdled to over 40 new highs this year driven by a strong economic recovery and formidable corporate earnings. Large cap U.S. stock returns have now surpassed small cap this year and continue to lead relative to international stocks.
The cyclical value sectors of the market (Energy and Financials) pulled back during the month. The strongest gains came from defensive sectors Healthcare and Utilities, mixed with continued strong results from the growth-oriented Information Technology sector as well as the Communication Services sector that is comprised of a combination of defensive telecommunication companies and more growth-oriented media stocks.
Stock market investors seem to believe that economic growth is sustainable while bond market investors are showing signs of skittishness and bidding down yields to levels not consistent with current growth projections. The bellwether 10-Year U.S. Treasury yield had the largest one month decline since March 2020, falling 24 basis points to 1.23%.
|S&P 500 Sector Returns||July 2021||YTD 2021|
Economic Review & Outlook
Spending By Confident Consumers Drives Growth
Consumer Confidence was reported at near pre-pandemic highs as shown in the chart below. The survey showed an increase in consumers indicating they plan to purchase cars, homes and appliances in the coming months. Demand remains robust for these big-ticket items even if available inventories are not. The rebuilding of inventories from strong goods consumption should be a tailwind for growth in coming quarters.
Home price growth climbed to a record in May despite falling lumber prices. Rather than pass along raw materials cost savings to consumers, builders are paying up for scarce labor resources and increasing profit margins when possible. New Home Sales fell -6.6% to 676k in June from a revised 724k in May. This is well off the 993k pace from January. Rapid price increases seem to be having a cooling effect on more expensive new homes. Buyers armed with attractive mortgage financing may be looking toward lower priced existing homes, where bidding wars continue to be the norm.
The Federal Open Market Committee (FOMC) met and stated that the economy has made progress toward their goals necessary to start tapering bond purchases. No definitive timeline was provided, (noting progress would be assessed in coming meetings… plural), but it is clear the Fed is having discussions of what a pullback in asset purchases may look like. They continue to view inflation as a transitory phenomenon and have no plans of hiking interest rates anytime soon.
Chart of the Month
Continues to Climb
Rising COVID cases in various areas of the U.S. are rightly receiving ample attention at the time of this writing, as they continue to be a factor that could send the economic recovery off course. The highly contagious COVID-19 Delta variant is now making up the majority of new cases. While cases are on the rise, fortunately death rates remain low, as do hospitalization rates for fully vaccinated individuals. ICU units are however hitting maximum capacity once again in certain parts of the country with unvaccinated patients suffering from severe symptoms. Increases in restrictions that limit consumers’ abilities to get out to local businesses is a factor we are monitoring closely.
Stellar corporate earnings have done their part to appease concerns of historically high equity valuations. A number of market pundits however, are espousing the idea that we are overdue for a market correction (a normal market decline of at least 10% that has taken place on average every year and a half or so.) Trying to time such an event, however, would be a fool’s errand. The stock market regularly experiences a bumpy road to new highs, hence why it is considered a risk asset. Taking a long-term view of markets is the most prudent approach to achieving investment goals, one we will continue to take on behalf of you, our clients.
Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.