(Please enjoy this updated version of my weekly commentary published August 30, 2021 from the POWR Value newsletter).

Heading into Monday, investors were looking to extend the momentum from the previous Friday’s mini-rally. Before that Friday, the S&P 500 had posted its worst weekly performance in a month. As I mentioned above, stocks were driven by an announcement that Pfizer’s COVID-19 vaccine earned formal approval from the FDA.

The move is expected to boost inoculation rates and help stop the spread of the virus’s Delta variant. Stocks continued to move higher on Tuesday and Wednesday before tumbling on Thursday after an attack at the Kabul airport in Afghanistan during the U.S. military’s withdrawal.

In addition, three Fed presidents spoke out on Thursday, encouraging the Fed to start reducing the number of asset purchases this year. This hawkish rhetoric also weighed on the market as the S&P 500 ended a five-day winning streak, and the CBOE Volatility Index jumped by more than 12%.

On Friday, investors were focused on Fed Chair Powell, who sounded dovish in his speech at the Kansas City Fed’s Jackson Hole conference. Powell stated that the economy had met the Fed’s objective for inflation, and the labor market recovery was making progress.

He did reiterate that the Fed could begin reducing asset purchases sometime this year, but that should not be taken as a signal of interest rate hikes any time soon. This message was well-received by investors as the major indexes rose following the speech.

In terms of economic data, most were positive. July’s existing-home sales rose 2% from June, which was slightly higher than the consensus expectations. This was likely due to more inventory being available in the housing market. July’s new home sales were up 1% from June, but down 27% from July’s figure from last year.

Weekly initial jobless claims slightly rose but remained near the lower levels of the pandemic. This indicates that the labor market is still strengthening even with the delta variant spreading. The Commerce Department’s revised estimate of second-quarter GDP growth showed that the economy expanded at a 6.6% seasonally adjusted annual rate, slightly above the initial reading of 6.5%.

According to projections from the Conference Board, GDP growth will climb to 7% in the third quarter and 6% for the year. The Conference Board also forecasts year-over-year GDP growth of 4% in 2022 and 3% in 2023. These forecasts were upgraded due to the likely passage of President Biden’s infrastructure package.

All in all, the economy seems to be on a solid footing. The flash August PMIs provided a glimpse of the economy at the end of the summer. Despite some deceleration, economic activity remains strong. While durable goods orders missed estimates, they still increased when you subtract transportation.

Plus, unfilled orders continue to move higher. With supply backlogs ongoing, the ratio of new orders to inventories is higher than the long-term average. In addition, the percentage of unfilled durable goods orders to shipments is also above the long-term average. Taken together, the inventory rebuild could act as a tailwind for growth in the next few quarters.

If we look at demand, personal income rose 1.1% in July, and the savings rate remains elevated at 9.6%. This supports a continued rotation from the consumption of goods towards services. The prolonged supply chain constraints combined with solid demand should support robust economic growth. This is beneficial for value stocks since long-term rates remain at very low levels.

Overall, I like what I see. The economic recovery continues to accelerate, the job market is improving, and the Fed just indicated that it wouldn’t raise rates anytime soon. When you add in the massive infrastructure bill that is likely to be passed, I believe the market continues to have upside.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $451.41 per share on Tuesday afternoon, down $0.82 (-0.18%). Year-to-date, SPY has gained 21.53%, 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. 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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