Duck, Duck, Grey Duck
When a duck is floating across a pond or lake it appears to be relaxed and at ease, but what we don’t see is the amount of work being done underwater as they frantically paddle their feet to move. The stock market last week was very similar – from a high level, it did not appear to do much despite there being many events happening below the surface. This was arguably one of the busiest weeks of the quarter with several high-profile companies reporting earnings, a relatively large volume of important economic releases, and a Federal Reserve meeting. Throw in renewed coronavirus worries due to the spread of the Delta variant and we would have expected some July fireworks, which did not come to fruition. Maybe the market hit the summer doldrums a little early or maybe the market simply has fatigue from the volatility over the past 18 months and simply decided to take it easy. Regardless, July is now in the books and provided the sixth straight month of positive stock market returns.
While a lack of volatility for the overall market may be easily apparent, that was not the case for some of the individual names. Many large companies, including tech bellwethers, reported decent earnings, but their stock prices reacted differently with some moving sharply higher while others sold off. If these companies all reported solid earnings that beat analyst’s expectations why did some of the stock prices drop? In most cases, forward guidance was not as strong as expected. The stock market is a leading indicator based upon future expectations with individual stock prices reflecting anticipated earnings or growth prospects. If those expectations are lowered, the price of a stock will drop. Conversely, we generally see the opposite when forward guidance is raised – stock prices rise. The past week was a good reminder of why it is important to have a diversified portfolio since individual stock prices can be unpredictable and often move in different directions.
GDP Growth, Consumer Confidence, and Inflation
There was a flurry of economic releases over the past week, all of which had the potential to move the market, but none seemed to have had much of an impact. This is understandable given how the releases were overshadowed by the volume of earnings releases and focus on the Fed meeting, which as predicted was anti-climactic. Of note was Q2 GDP came in below consensus estimates but still indicated some of the strongest quarterly growth in decades and provides evidence to the fact the post-pandemic economic recovery remains intact. Consumer Confidence and the University of Michigan Consumer Sentiment index both beat expectations, indicating consumers continue to feel good about the economy and consumer spending can be expected to remain strong.
Also of note is the core personal consumption expenditures (Core PCE) index, which happens to be the Fed’s preferred measure of inflation, experienced the largest increase since June 1991 and further signals rising inflation. This is a key theme we continue to monitor and are positioning portfolios accordingly to not only shield against inflation but also take advantage of it.
With a high volume of earnings reports and economic releases continuing in earnest, we expect the potential for some market volatility during the next week. We will be paying special attention to the employment reports, culminating with Non-Farm Payrolls on Friday, to gauge the continuing strength of the post-COVID recovery.
Like a duck swiftly padding underwater but appearing calm above the surface, we continue our tireless work of keeping abreast of the markets and managing portfolios accordingly to navigate risks and capitalize on opportunities.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist