(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).
As I’ve mentioned in my past commentaries, I believe there will be constant back and forth between up days and down days in the market as long as COVID is still a concern. The S&P finished down 0.37% last week, with the Delta variant and the China crackdown being the big stories.
Chinese stocks plummeted as China clamped down on an array of industries. Stocks in Asia did recover as Beijing made comments to calm down investor anxiety. While this is something I plan to keep an eye on, I don’t believe it will negatively impact the U.S. markets or our holdings.
We learned from the Federal policy meeting that the Fed wouldn’t change its accommodative stance over the near term, but there will be a change at some point. I don’t believe we will see a jump in rates until 2023. The Fed also noted that it could be some time before it begins tapering of asset purchases.
Economic growth remains on a positive track, but the labor market still has a way to go before trimming its monetary policy support. We should get more details in September, but as of now, everything remains the same.
In terms of inflation, rising auto prices have been a critical driver. As I mentioned in my articles before, the used car bubble, driven by a shortage of chips, sent used car prices through the roof, but that appears to be leveling off, which is good news for inflation.
The Manheim Auctions Used Vehicle Value Index fell 1.7 percent in the first half of July, following a 1.3 percent fall in June.
This is similar to the lumber picture, as supply and demand imbalances are getting worked out. So the Fed appears to be right on when it comes to inflation being transitory.
While the latest numbers for U.S. GDP and initial jobless claims came in below expectations, stocks still rose. That’s because investors are showing optimism, which was my theme last week.
The Bureau of Economic Analysis reported on Thursday that second-quarter GDP grew 6.5% year over year, less than the estimated 8.4%. This was mainly caused by dropping inventories.
The good news is that personal expenditures grew 11.8% in Q2, and consumer confidence is rising. The Conference Board reported that its Consumer Confidence Index increased to 129.1, its highest level since February 2020.
So, while shortages and supply chain bottlenecks are slowing the recovery, the economy continues to grow, and consumer spending is strong. The supply issues should soon resolve soon.
Plus, corporate earnings are growing at a fast pace. As of Friday, 59% of S&P 500 companies reported actual results for the second quarter.
In this group, 88% reported above estimates, which is above the five-year average of 75%, according to FactSet. A lot of the companies that have outperformed estimates have been in the technology sector, which helps explain why we have seen a rotation into growth stocks.
But I expect that to change as the economy reaches peak growth, in which case, value stocks should outperform.
The biggest issue right now is the summer surge of the Delta variant. If this continues, we could see a rather significant dent in the market. But vaccination rates are on the rise. According to the CDC, there was a 26% increase in average national daily vaccinations (26%) over the past three weeks.
However, the more cases rise, the more volatility we could see over the short term. But as I mentioned last week, the Delta variant shouldn’t impede the economic recovery. In fact, the economy is expected to get a boost from the infrastructure plan.
Last week, in a bipartisan vote of 67 to 32, the U.S. Senate voted to advance the President’s $1.2 trillion infrastructure bill. The bipartisan support was likely driven by lobbying from the construction industry. The legislation is expected to pass sometime this week.
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Chief Value Strategist, StockNews
Editor, POWR Value Newsletter
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SPY shares were trading at $440.71 per share on Tuesday afternoon, up $3.12 (+0.71%). Year-to-date, SPY has gained 18.65%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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