(Please enjoy this updated version of my weekly commentary published September 22, 2021 from the POWR Value newsletter).
Since my last commentary, the market fell last Thursday even after a better-than-expected report on retail sales. The Commerce Department’s August retail sales report showed overall sales rose by 0.7% after a 1.8% drop in July. This suggests that consumer spending held up despite concerns over the Delta variant of COVID.
While new unemployment claims posted an unexpected slight gain, rising to 332,000, this is still a low figure during the pandemic. Then, a new report showed that consumer sentiment missed estimates in early September and is near a decade low due to continued concerns over inflation.
This week, the market started with another loss due to COVID fears, concerns over the Fed’s next steps, but driven mainly by worries over a potential debt crisis in China due to The Evergrande Group. The company is China’s second-largest property developer by sales. It is struggling with $300 billion in debt and has also been missing payments.
The CBOE Volatility Index or VIX rose by more than 30% to its highest level since May. While Evergrande will pay the interest due on Thursday on one of its bonds, it isn’t out of the woods yet as there is another more significant payment due this week. The market hopes that China will step in to save the company, but that is yet to be seen.
In my opinion, a more prominent issue right now is the debate over increasing the government’s borrowing limit. While the House passed the spending bill and debt limit, the measure is now in the Senate’s hands.
The bill maintains current federal funding levels through December 3 and a suspension of the debt limit through December 16, 2022.
Passage will prevent a partial government shutdown and defaulting on the nation’s debts. While I’m hoping it will be passed, beware of potential volatility if it doesn’t. After the market ended mixed yesterday, we finally saw gains today.
Stocks rose as investors’ attention was redirected from a potential default of Evergrande and to the Fed’s latest monetary decision. Fed Chair Jerome Powell appears to be laying the groundwork for a near-term announcement that it will start tapering its asset purchase program if economic progress continues.
We also saw the first look at their expectations for 2024 that suggests the committee is currently divided on rate hikes for next year. Nevertheless, even with concerns this week, there is reason to be optimistic. The economy continues to move along even with the Delta variant hanging over our heads.
Plus, I expect labor shortages and supply chain issues to resolve within the next couple of months. And while the market does seem bearish right now, remember bull markets often experience periodic selloffs. Even today’s gains reflect the resilience that the market has displayed during the pandemic.
The long-term economic and earnings outlook looks strong. The estimated year-over-year earnings growth rate of the S&P 500 for the third quarter is approximately 28%. This would represent the third-highest year-over-year growth rate since 2010.
In addition, analysts project a year-over-year earnings growth of more than 20% for the fourth quarter. This should support equities towards the end of the year. We also got good news from Pfizer on Monday, as data from recent trials suggested that children 5-11 had a safe and effective response to its Covid-19 vaccine.
As more people get vaccinated, the market sees it as a positive sign for the economy.
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SPY shares were trading at $443.77 per share on Thursday afternoon, up $5.91 (+1.35%). Year-to-date, SPY has gained 19.85%, 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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