Market Strategy 7/12/2021
- July 12, 2021
Let Context and Right-sized Expectations Be Your Guide
A spate of market drama last week ended broadly in an “all’s well that ends well” mode
Key Takeaways
- Last week large cap stocks stateside closed with a trifecta of record highs for the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite as economic growth concerns eased and bond yields stabilized.
- Mid-cap and small cap stocks slipped and trimmed as markets last week favored large cap stocks and large cap technology.
- Q2 earnings season gets underway this week with the big banks starting to report on Wednesday. Results and guidance could carry weight in determining the direction of stocks in the weeks ahead.
No small degree of drama last week in the bond market (and to a lesser degree in the equity market) caused a detour for stocks that ended back on course with a trifecta of new record highs in the Dow, the S&P 500 and the NASDAQ Composite as the yield on the 10-year Treasury closed just 7 bps lower from where it had started the week. For the week the Dow 30, the S&P 500 and the NASDAQ Composite indexes respectively advanced a modest 0.24%, 0.40% and 0.43%.
The S&P 400 (mid-caps), the S&P 600 (small-caps) and the Russell 2000 slipped and trimmed last week respectively 0.12%, 0.74% and 1.12% suggesting to us that a rotation and rebalancing thematic persists among equities that is not atypical of dayto-day and week-to-week moves in a bull market navigating a highly transitional economic and market environment post a major crisis.
To Reflate or Inflate: Which Will It Be?
The yield on the US 10-year Treasury note has garnered considerable attention this year and raised varied degrees of concern as it moved from a low of 0.914% on January 4 to as high as 1.742% on March 31 only to fall as low as 1.294% on Thursday before ending last week at 1.361%.
The question at the core of the movements in the 10-year Treasury’s yield for most of this year has been whether economic re-openings stateside and around the globe will generate levels of longer lasting inflation for economies, central banks and markets to contend with or will the near-term inflation consumers and businesses are experiencing be transitory as economies transition to a post-Covid environment.
Financial stocks and railroads, which both took a walk on the down side last week, may have been among “the babies tossed out with last week’s bath water.”
It’s Back! The Pandemic Won’t Be Ignored
Last week’s volatility in the bond market appeared to ask the question “are we headed out of the woods from the pandemic or are we at risk of being dragged back into the maelstrom by variants of the dreaded virus?”
With the answer to neither of the aforementioned questions likely to be known for some time in the current highly transitional environment we’d expect, based on our experience in the markets over the course of nearly four decades, that investors are likely to benefit from practicing diversification and patience, while keeping their near-term expectations of market performance right sized while markets navigate nearterm choppiness that is likely to intermittently lie ahead. Keeping an eye out for “babies thrown out with the bath water” in downdrafts when they occur could also prove beneficial. In the meantime, we’d suggest making “shopping lists" of worthy stocks or funds to add to when volatility brings more attractive entry points for putting cash to work.
Considering the potential of the economic recovery and sustainable expansion that likely lies ahead for the US once the pandemic is more clearly in the rearview mirror: financial stocks and railroads (found among the industrial sector) which took a walk on the downside last week may have been among “the babies tossed out with last week’s bath water.” Time will tell.
Hey Mr. Spaceman Won’t You Please Take Me Along For a Ride?
World class billionaire Richard Branson took a longawaited and long-planned test flight to space joined by five of his firm’s employees on Sunday. The momentous event, which is expected to move the world closer to tourism in space travel, reminds us that the more things change the more some things actually do change.
At Long Last Q2 Earnings Season
Q2 earnings season gets underway in earnest this week when the big banks report results starting on Wednesday.
Consensus analyst expectations are looking for earnings growth for the S&P 500 index in Q2 to be around 64% so revenue and earnings results as well as any guidance offered as companies report across the sector could have considerable importance to the direction stocks take over the course of the weeks ahead.
Economic Data this week
Investors this week also will ponder a brace of economic data crossing the transom that will include the CPI (consumer price index) and the core CPI (excluding energy and food). A survey of economists’ forecasts looks for the headline CPI to move slightly lower as the core edges higher in the report to be released on Tuesday.
On Wednesday the Federal Reserve releases its Beige Book, a compendium of anecdotal evidence of economic activity in 12 Fed Regions across the US. The PPI (Producer Price Index) and the core PPI are also scheduled for release on Wednesday with surveys of economists expecting increases in both for the month of June. On Friday look for the University of Michigan’s Consumer Sentiment Index and the Census Bureau’s retail sales numbers for June.
All this and more on tap in the week ahead.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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