Weekly Market Commentary: July 11 – 17
Dow bows to Delta variant
Well all of a sudden, the markets decided to start paying attention to a new surge in coronavirus cases and concerns over growth. I have been saying this for the past few months. The first half of 2021 was going to be solid and then my expectations were for us to slow meaningfully in the second half of the year. Markets ran up so far this year on vaccine availability, reopening, tons of stimulus and anticipation of stellar earnings. Well we did get vaccines, but the effort to vaccinate everyone has stalled. We have reopened as much as we can and now, thanks to the appearance of the Delta variant, it looks like reopening may be done and we may see some backsliding. Stimulus spending has hit a wall in D.C. and that appears to have stalled as well. Finally, expectations of really good earnings have driven up the markets in the past few weeks and now appear to be not as great as expected. Add to that slowing economic data and inflation worries and you have a sell-off like we experienced today. Truth be told, we have no idea if today is the start of something or just a day or two of angst in the markets as we work through a slow summer week. Volatility has popped over 25%, so markets are worried. The trick is if they remain so; up until this point buyers have come in and propped the markets back up. It still remains to be seen if that will be the case this time around. Keep a watchful eye on the horizon
Inflation: not so transitory
Last week, we received the bad news that inflation seems to be rising and doesn’t show signs of slowing down. We’ve been told by Federal Reserve Chairman Jerome Powell and the Biden administration that the increase is “transitory” and that it will slow to more normal levels. I don’t believe that, nor do I want to hear that after prices go up 50%, they’re only going to rise 2% a year from now on. An increasing number of people are beginning to share my view that inflation will not be transitory, and Chairman Powell himself is trying to shift the initial messaging. I don’t care how prices rose by 25% or 50% and how long it took; the fact that everyone seems to be missing is that these increases will not come back down. The longer this lasts and the higher the inflation rate goes, the more we’ll all have to pay for stuff.
I don’t see this ending well, and all the money Washington has thrown at the country and the Fed’s continued suppression of interest rates is to blame. People will have to live with the fact that they will spend more for less unless there is a corresponding increase in wages. Producers will charge more to make up for higher labor costs and prices will keep going up. For example, Blackrock has preemptively raised employees' salaries by 8%. Do we really think they won't pass that cost on to investors who use their products?
So how do we engineer a soft landing? Unless we end all this undisciplined spending and easy access to credit via ridiculously and artificially low rates, I don’t think we will have a soft landing. I believe Chairman Powell will lose his cool and the Fed will jam on the brakes. They will lose this game of chicken they are playing with inflation and overcompensate, then — BOOM! — the whole party will come to a screeching halt. (Just like it did in 2018 when the market forced Chairman Powell to blink and stop the scheduled rate increases the Fed had announced.) Buckle up because I think it will be a rough ride in the second half of 2021.
Little breadth in the market as FAANGs continue to lead
Speaking of 2018, it was a pretty good year for the most part, at least three-quarters of it. Then the bottom fell out in the fourth quarter. I’m not a huge fan of technical analysis, but breadth is something I look at. If the markets are advancing broadly (i.e., the “rising tide lifts all boats scenario”) that’s healthy and tells us the economy is doing well, businesses thrive and there is enthusiasm all around. But when the markets rise on the backs of a handful of companies while the rest of it remains stalled, that may mean it’s time for concern
Second-quarter earnings are coming out and have been mixed so far. A lot of the run-up in the market over the past month has been on anticipation that earnings would be huge. The fact that there was no new big thing from Washington in the past few weeks funneled the markets into making Q2 earnings the next big thing, at least in my view. It also pushed the markets to new highs early last week.
If these earnings are largely priced in, where do we go next? Well, we turn to the ol’ standbys — like FAANG (Facebook, Amazon, Apple, Netflix and Alphabet (Google)) stocks— and that’s how you get a narrow market. Just like water, liquidity finds a way, so if we want the markets to keep going up, let’s push the stocks we know can go higher. The problem with that is those stocks tend to be very similar and all it takes is a strong crosswind to knock all of them for a loop. And if the rest of the market is flat, it doesn’t provide any support when they tumble — leading to a mad rush for the exits as we saw in 2018. Maybe I’m blowing this out of proportion, but I’ve seen a sell-off or two and the whole thing has a “been there, done that” feel to it. I think it’s a situation worth watching
$6 trillion budget gets a $3.5 trillion makeover
First, we were talking about a $2+ trillion infrastructure package. Then it morphed into $1 trillion with the understanding that a $6 trillion budget would be approved in conjunction. Now it appears that the budget has turned into $3.5 trillion and is not contingent on the infrastructure deal.
Sound confusing? It sure is. There has been a lot of “proposed” spending, but the only thing that’s actually been passed into law is the American Rescue Plan in March with a price tag of $1.9 trillion. The amount was so massive that there was enough left over and available for President Biden to suggest that funds could be used by cities suffering from significant increases in crime. If you read the particulars of the plan, you do not see crime or police mentioned at all — yet there is so much extra money that we can repurpose it in new ways? After taxpayers backfilled failing state pension plans and budget shortfalls, we still have all this “extra” money?
You know where I’m going with this next: If you can’t spend what you have, why do you need more? And if you actually “need” half of what you originally asked for, what happens to your credibility? It’s hard to accept that all this “urgent and much needed” spending is really “urgent and much needed” when you have so much money left over. Sounds like a slush fund to me!
Coming this week
Companies will continue reporting second-quarter earnings this week. As I said earlier, earnings have been mixed. The markets will punish any company that fails to measure up, especially since anticipation of stellar earnings has been one of the main reasons the markets have been moving up
Data will be scant this week, a slow week in the middle of summer, which is a traditionally slow period for markets.
We will get some housing data this week, including housing starts and permits (Tuesday), mortgage applications (Wednesday) and existing home sales (Thursday).
Leading indicators on Thursday and the PMI composite flash on Friday will give us a pulse on how rapidly inflation is rising or if it’s showing signs of abating.
Finally, there is the monthly Treasury auction on Thursday. Considering recent economic data, that could end up being a little spicy.
Have a great week!
Tom Siomades,
CFA® Chief Investment Officer AE Wealth Management
AE Wealth Management, LLC ("AEWM") is an SEC Registered Investment Adviser (RIA) located in Topeka, Kansas. Registration does not denote any level of skill or qualification. The advisory firm providing you this report is an independent financial services firm and is not an affiliate company of AE Wealth Management, LLC. AEWM works with a variety of independent advisors. Some of the advisors are Investment Adviser Representatives (IAR) who provide investment advisory services through AEWM. Some of the advisors are Registered Investment Advisers providing investment advisory services that incorporate some of the products available through AEWM. Information regarding the RIA offering the investment advisory services can be found on https://brokercheck.finra.org/. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The personal opinions expressed by Tom are his alone and may not be those of AE Wealth Management or the firm providing this report to you. The information and opinions contained herein, provided by third parties, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management. This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product. 1707820-3
