Market Strategy 9/07/2021
Don’t Stop Believin’
Although the August jobs gain disappointed, we saw much to like in the report and believe opportunities outweigh risks at this juncture
Key Takeaways
- Although August’s jobs gain disappointed, we saw some resilience in that the prior two months’ gains were revised upward. The weakness in job creation was centered in the services sector, which paused hiring after posting strong monthly gains.
- Foreign equity market returns for US investors have been reduced by persistent strength in the US dollar this year. We look at returns in US dollar and local currencies for a number of foreign indexes.
- With the Q2 reporting season for the S&P 500 drawing to a close earnings were up an impressive 92% from a year earlier on revenue growth of 25.4%. Four sectors delivered triple-digit earnings growth in the period.
With a relatively light calendar of economic data this week (but not without some items of importance tied to jobs, unemployment, mortgages and producer price inflation) investor focus will likely remain on risks tied to Covid-19 variants; potential of sticky inflation; supply chain disruptions; labor shortages; a risk that politicians could overstimulate the economy; a likelihood of higher taxes for corporations and high wage earners that could reduce future earnings growth and investment along with heightened geopolitical risk.
All of the above taken into consideration it is our view that equities could well persist in climbing the proverbial “Wall of Worry.” Interest rates remain near record lows and seem unlikely to rise to levels that would choke off the economic recovery process and reverse the equity market’s trajectory. We expect that when the Fed begins tapering its monthly bond buying program it will telegraph its actions well in advance, reducing the risk of market shock. Technological innovation remains robust and benefits all eleven sectors. Merger and acquisition activity is on the rise to meet the opportunities generated by creative disruption. Booster vaccines of efficacy are likely to relieve consumer and business pandemic variant worries. In this scenario equities could well continue to climb the proverbial “Wall of Worry” if not without an occasional catalyst appearing on the scene to justify some profit-taking without “FOMO” (fear of missing out) by skeptics, nervous investors and bears. It could also present another opportunity to yet again “buy a dip.”
For all the significant risks that lie on the economic landscape stateside and globally the positive offsets to the negatives appear to us to signal that for now opportunity continues to outweigh risks.
The secular juggernauts of technology and globalization in our view remain in place as a multi-decade one country centric supply chain begins to move (if still too slowly) towards a multi-country supply chain that could deliver the next tranche of prosperity across the globe.
This Week’s Data and Events
The stateside economic calendar this week is relatively light in comparison to last week’s brace of economic data. That said data scheduled for release this week will provide insight on a variety of key data points. On Wednesday look for mortgage applications; the Bureau of Labor Statistics’ “JOLTS” Job Openings index (expected to remain near record levels at around 10,000,000 postings for positions companies are looking to fill); Consumer Credit; and the Federal Reserve’s “Beige Book” which provides anecdotal evidence of how the Fed’s regional economies across the US are faring. Thursday: Initial jobless claims and continuing jobless claims. Friday: The Producer Price Index month over month and year over year through August and wholesale inventories.
Q2 Earnings Season Wrapped Up
S&P 500 Q2 earnings season is close to wrapping up. With 496 of the benchmark’s 498 (over 99%) of companies having reported results, earnings growth year over year was up 92% on the back of 25.4% revenue growth. Of course it was an “easy comps” earnings season with comparisons to the same period in 2020 for most sectors. The strength and resilience of companies reporting in Q2 earnings season not only reflected navigation of “easy comps” but the contribution of innovation, experienced management capabilities and the strength of the consumer in a period of great challenge that persists to this day from the pandemic and the disruptions it has caused to the economy and society.
Five sectors delivered triple digit earnings growth in the quarter thus far including industrials up 343%, consumer discretionary up 319%, financials gaining 172% and materials up 133%. All four of these sectors are cyclical sectors.
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