What a difference a day makes
I grew up in South Dakota, where they have a saying, “If you don’t like the weather, stick around for 24 hours.” It seems the same can be said about the stock market. On Monday, the markets suffered the worst single-day losses of the year due to concerns about rising coronavirus cases from the spread of the Delta variant and the potential for restrictions being re-imposed. Given the strong gains in the market already this year, many analysts (a.k.a. talking heads/fear mongers) have been sounding the alarm about a pull-back. Hence, there was worry Monday’s losses were the beginning of a longer-term downward trend. Fortunately, these fears were soon quashed as the markets quickly recovered losses and went on to show gains by the end of the week. Besides shrugging off concerns about coronavirus, the market was driven higher by strong earnings reports, especially from Dow components IBM, Coca-Cola, and Johnson and Johnson.
Those who did not keep a daily eye on the market last week would have thought the market simply enjoyed a march upward. Monday’s sell-off saw the S&P 500 experience a 2% single-day loss, but by Friday, the S&P 500 was higher by almost 2% compared to a week ago. This is a great example of why investors should not be concerned with day-to-day, or even week-to-week, market gyrations but instead should stay focused on the longer term.
Many people remain on edge regarding another round of coronavirus cases spreading, specifically the potential for restrictions being re-imposed. My prediction is these concerns abate as time passes, especially as more people are vaccinated. Also, it seems the majority of people in the U.S. and most developed countries have “COVID fatigue,” so any large-scale restrictions would be met with resistance and, in most cases, would not be politically popular. Coronavirus will become less, and less of a factor on the market – similar to when you throw a rock in a lake, the first splash is the biggest but the farther away you get, the smaller the ripples.
It was a relatively quiet week for economic releases, with the exception being housing data. The National Association of Homebuilders (NAHB) Housing Market Index, Existing Home Sales, and the number of building permits all came in below expectations while Housing Starts were above expectations. There is no doubt the housing market may be a little “over-heated” and due for a slow-down but should be more of a leveling-off versus a crash like we experienced in 2007/2008 since conditions are different this time, namely tighter lending standards, lower interest rates and a growing demographic of people looking to purchase a home. The recent housing craze has been driven by an increase in demand since workers are not as geographically constrained due to the ability to work-from-home and supply-chain issues with raw materials due to COVID-related shutdowns. The supply chain issues are being worked out with raw materials prices normalizing, but labor costs remain a concern.
The next week will be busy on the earnings front with tech leaders Apple, Microsoft, Alphabet (Google), and Amazon set to report. Any downside earnings surprise could have an adverse impact on the market, but that seems unlikely since all have historically provided strong, consistent earnings, which does not seem likely to change in the near term. It is also a heavy week for key economic releases, including Durable Orders, Consumer Confidence, Gross Domestic Product (GDP), and Personal Consumption Expenditures (PCE), any of which have the potential to move the markets if there is a large variance from expectations. PCE is the Federal Reserve’s primary measure of inflation, so there could be special attention paid to that number, not necessarily by the financial news outlets but more so by economists and analysts. Speaking of the Fed, the Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday, but we do not expect any surprises since they generally telegraph expectations well in advance.
That will bring us to the end of July. Historically, August has been a relatively quiet month in the markets, gearing up for what have traditionally been the more volatile months of September and October. We will have to see if this year brings more of the same.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist