by William Henderson, Vice President / Head of Investments
Last week’s rollercoaster ride in the markets ended with the Bulls taking command by the end of the week with each of the major stock market indexes finishing well into positive territory. For the week, the Dow Jones Industrial Average gained +1.1%, the S&P 500 Index added +2.0% and the tech-heavy NASDAQ gained an impressive +2.8%. Weekly gains added to an already strong year of returns across all three indexes. Year-to-date, the Dow Jones Industrial Average has returned +15.7%, the S&P 500 Index +18.4% and the NASDAQ +15.5%. Treasury Bonds rallied for another week, with the yield on the 10-year U.S. Treasury Bond falling by 2 basis points to close at 1.23%. Bonds continue to puzzle investors as most traders expected yields to rise this year as the Fed started to taper its bond purchases.  The Fed meets this week and perhaps during Chairman Powell’s press conference after the meeting we will get some direction. The bellwether 10-year U.S. Treasury Bond dropped more than a quarter percentage point since the Fed’s last policy meeting, and at that meeting we saw the U.S. central bank officially kick off discussions about a timeline for reducing asset purchases (tapering) and lifting interest rates from their current 0-0.25% range. 

As mentioned, we saw a broad rally in the markets last week. This was in stark contrast to concerning news around the spread of the Delta Coronavirus. The markets seem to be signaling that the spread will be contained and strength in many other sectors of the economy will continue to fuel a strong recovery. Among the positive economic indicators is the falling unemployment rate and strong corporate earnings.  (See chart below from the Federal Reserve Bank of St. Louis) 

Unemployment continues to fall and the initial supply of labor and demand for labor imbalance seems to be abating a bit; especially as unemployment benefits taper off. Most earning releases for the second quarter exceeded analysts’ expectations but remember the results were compared to 2020’s drastically reduced earnings as a result of the pandemic. Third and fourth quarter results will prove to be a more important indicators of a true earnings recovery. 

There was an interesting twist thrown into the always fun cryptocurrency market as Bloomberg reported seeing Amazon’s “Job Vacancy” website listing an advertisement for a “digital currency and blockchain product lead.” The news sent many cryptocurrencies higher after being battered for several weeks. Bitcoin surged to a six-week high just below $40,000, (see chart below from Bloomberg). 

The possibility of the world’s largest internet retailer accepting cryptocurrency for payment or even creating their own Amazon specific cryptocurrency has breathed some life into the recently faltering market. If nothing else, this market is exciting to follow. 

As stated above, the Federal Reserve meets this week to discuss monetary policy, inflation expectations and unemployment concerns. Most economists do not see this as being a pivotal meeting. According to Bloomberg, three-quarters of economists they surveyed expect the Fed to hold off on signaling a tapering of asset purchases or an increase in rates until the at least the Jackson Hole, Wyoming Fed Retreat Meeting in August, or the September 21-22 meeting. That said, watch for any signal from Chairman Powell at the press conference where he could hint to a change no one expects. 

We believe the economy is well under way for its recovery, vaccines exist for COVID-19 and its variants, and corporations and consumers are in excellent financial shape. Healthy markets always have pull backs and sell offs during an extended bull rally and we expect the same in 2021.  

by William Henderson, Vice President / Head of Investments
With second quarter earnings season well under way, last week saw a slight retreat in all three major indexes as stocks sold off a bit from their previous highs. The Dow Jones Industrial Average fell (-0.5%), the S&P 500 Index lost (-1.0%) and the NASDAQ sold off by (-1.9%).  Regardless of last week’s modest sell off, year-to-date returns remain strong across all three indexes.  Year-to-date, the Dow Jones Industrial Average has returned +14.5%, the S&P 500 Index +16.1% and the NASDAQ +12.3%; representing a broad rally across industries and sectors. Bonds continued to be torn between inflation-related news and Federal Reserve Chairman Powell’s commitment to keeping rates lower for longer. Confounding bond bears, yield on the 10-Year U.S. Treasury dropped an additional nine basis points last week to close at 1.25%, a full 49 basis points lower than the 1.74% yield level hit in March of this year. 

Inflation news was all the rage last week when a monthly measure of U.S. consumer prices rose at the fastest pace since 2008. June’s Consumer Price Index rose 5.4% from the same period a year earlier, which surprised most economists who expected the recent spike in inflation to begin to moderate. (See chart below from the Federal Reserve Bank of St. Louis.) 

While the spike in inflation was much larger than expected, breaking down the results revealed that about 1/3 of the increase was due to increases in used-car prices. Inflationary pressures were certainly broadly felt by consumers elsewhere, as food prices increased 0.8% in June and gasoline prices rose by 2.5%. In his report to a U.S. Congressional Panel, Powell repeatedly stated two things: 1) He would not hesitate to raise interest rates if needed to control runaway inflation; and 2) He expects consumer prices to ease later this year. However, Powell firmly believes significant progress in terms of employment and inflation is still needed before short-term interest rates are increased.   

Wall Street analysts are expecting strong earnings results from companies focused on technology, materials, and healthcare as final 2Q results are announced.  Looking beyond 2Q, companies will have to deal with increases in prices of materials and labor and this could certainly impact earnings, especially in firms where their ability to pass on costs to consumers is limited. Conversely, we have seen some modest price declines in materials like copper and lumber. The overall supply/demand mismatch is abating and these factors will assist companies going forward.   

The moves in U.S. Treasury Bond prices as noted above with the 10-year note falling to 1.25% seem to harken back to the early trading patterns when the pandemic first struck in 2020. Surging cases of the new Delta variant of the COVID-19 virus in many parts of the world, including highly vaccinated countries such as the U.K., could be prompting a flight to quality by investors. Lastly, any impediment to a continued re-opening of the global economy will impact future economic growth and concomitant earnings results for equities. Concerns abound and markets are a tricky business. Modest pull backs in equity markets like last weeks and even larger corrections in bull markets are healthy and expected. Equity prices never go straight up, they go up and down and up; generally going from the lower left of a chart to the upper right. Keep focused on long-term trends and a Federal Reserve that is committed to a healthy recovery.