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Week in Review: August 2, 2021

Recap & Commentary

Equity market returns for the week were mixed as multiple factors – corporate earnings, economic data, the Fed, infrastructure, China, the Delta variant – jostled for investor attention.

A surge in new coronavirus cases, including “breakthrough” cases, led the CDC to recommend that people wear a mask in public settings in areas of substantial or high transmission, areas that account for over 75% of the US population. While there are no expectations that large scale restrictions will be reinstituted, the rapid spread of the Delta variant may impact economic activity, particularly to the extent that it alters consumer behavior.

As expected, the Fed made no changes to monetary policy at its July meeting.  Speaking afterwards, Federal Reserve Chair Jerome Powell stuck to his well-worn talking points that current inflation largely reflects “transitory factors” and that the Fed is unlikely to make any significant changes to monetary policy without additional improvement in labor markets. As for tapering its current asset purchases, Powell stated that the Fed took a “first deep dive” on how to approach tapering and will continue the discussion at “coming meetings.”

The Senate moved forward on a $1T infrastructure bill that would include ~$550B of new spending. While final passage remains uncertain, the current bill appears to have broad bipartisan support, increasing its chances of passing.

Through Friday, 59% of S&P 500 companies had reported 2Q21 earnings. Thus far, 88% have beaten their estimates. According to industry group Factset, 2Q21 earnings are on pace to increase 85% from 2Q20.

Economic Bullet Points

Second quarter GDP grew 6.5%, 0.2% better than 1Q21, but a full 2.0% less than expected. Consumer spending led the way, increasing by 11.8%. Business spending contracted for a second consecutive quarter, falling 3.5%, hurt by residential housing and net exports. A reduction in government spending also impacted headline growth.

New home sales fell over 6.5% in June, marking the third consecutive monthly decline. Compared to a year ago, sales were down 19%, the first year-over-year decline since the start of the pandemic. The decline was attributed to ongoing shortages of lumber, labor, and other building materials that have forced many builders to temper their building activities.

Pending home sales fell nearly 2% in June. Compared to a year ago, sales were also down 2% while prices rose 17%, suggesting that some of the slowdown could be due to potential buyers being unable or unwilling to buy at current levels.

Core PCE inflation, the Fed’s preferred measure, rose 0.4% in June, down from 0.5% in May, and below the 0.6% forecast. Compared to a year ago, inflation rose 3.5%, up from May’s gain of 3.4%, but below the forecasted 3.7%. While too early to call a top, the deceleration in the monthly gain, along with other anecdotal evidence suggests that inflation may be peaking.

Of Note

China’s equity markets shed ~$1T following the government’s crack down on for-profit tutoring companies. The move along with other recent actions has increased investor uncertainty about investing in Chinese equities.

S&P 500-0.4%
Small Caps0.8%
Intl. Developed0.6%
Intl. Emerging-2.6%
Commodities0.6%
U.S. Bond Market0.3%
10-Year Treas. Yield1.23%
US Dollar-0.8%
WTI Oil ($/bl)$74
Gold ($/oz)$1,813

The Week Ahead

  • July Employment Report
  • ISM Manufacturing
  • ISM Services
  • Weekly Jobless Claims

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