Equities finished the week mixed with the S&P 500 index and the Nasdaq hitting new highs. For eight consecutive weeks, large-cap growth outpaced value as reflected in the Russell 1000 Growth Index. In June, strong performance from technology and health care along with consumer discretionary propelled the S&P 500.
The TSX finished the week and month flat and up 2.48%, respectively. The S&P 500 gained 1.67% during the week and closed the month up 2.33%. The technology-dominated Nasdaq advanced 1.94% in the week and closed the month up 5.55%. The mid-cap and small-cap indices were negative for the week. The European equity markets, except for the French CAC-40 (losing 1.06%), were generally down slightly on continued concerns of earlier-than-anticipated rate increases.
Positive economic data kicked off the week with the Conference Board’s release of the latest Consumer Confidence Index, improving to 127.3 (the highest level since March 2020) from May’s 120.00. The Present Situation Index, which is consumers’ assessment of current business and labor market conditions, jumped to 157.7 from 148.7. The Expectations Index also rose to 107.0 from last month’s 100.9. The Expectation Index is based on the consumer’s future outlook for business, income and labor markets.1
Consumers’ opinions of the labor conditions improved with 54.4% of consumers indicating jobs were “plentiful” compared to last month’s 48.5%, and consumers who claimed jobs were hard to find dropped to 10.9% from 11.6%.2
The ISM Manufacturing Index retreated to 60.6% in June from the 61.2% reported in May. (A reading above 50 is an indication of a growing economy.) Encouraging, 17 of the 18 industry groups surveyed reported expansion in June over May, with no industry sector reporting a contraction. While new orders fell slightly to 66% in June from May’s 67%, 15 of the 18 industry groups reported growing order books. Also noted were chronic labor and materials shortages, along with delivery issues creating delays in filling orders. Delivery issues continue to plague 17 of the 18 reporting industry groups.3
In other economic data, pending home sales jumped 8% in May on declining mortgage rates after homes sales declined in April.4 The initial jobless claims fell 51,000 to 364,000, the lowest level since last year’s pandemic low. However, continuing claims rose 56,000 to 3.47 million from last week’s pandemic low.5 The big surprise for the week was the BLS (US Bureau of Labor Statistics) nonfarm jobs report, reporting employment rose by 850,0006 compared to the Bloomberg median expectation of 720,000.7 As expected, Leisure and Hospitality added 343,000 jobs, followed by Government (188,0000) and Retail (67,000). Manufacturing added 15,000, while construction lost 7,000. Wages also increased by 10 cents to $30.40 for the average hourly employee, but interestingly, the average workweek for all employees decreased by 0.1 hours to 34.7 hours. The decrease in Manufacturing was 0.2 hours to 40.2 hours, and overtime decreased by 0.1 hours to 3.2 hours. The participation rate for June remained unchanged at 61.6.8
The market reaction to the positive economic data pushed equities higher and the 10-year Treasuries lower, indicating earlier fears that inflationary pressures would result in an adjustment to the timeline for a US Fed rate response were misplaced, at least temporarily. With rates on the 10-year Treasury pulling back from earlier highs, the bond market does not appear to be too concerned that the Fed will change course anytime soon. The pull-back in rates has re-invigorated growth stocks pushing indices higher. Time will tell if the inflationary pressures coming from the supply side are transitory as policymakers suggest or more permanent. Currently, market participants appear to be siding with policymakers.
Late last year, as the 10-year Treasuries rates rose, we witnessed a rotation into the value inflation trade from growth. As mentioned earlier, rates have declined since mid-April and the markets have rotated back to the growth trade. As the markets creep higher, valuations are looking a little stretched, and once again, concerns of a market correction become worrisome. Market action is looking tired, and a correction or a pause would not be unexpected as we head into the later stages of the summer. Q2 earnings season may provide some guidance regarding future earnings and support current valuations if rates remain stable. Inflation is almost always initially interpreted as transitory. If it becomes apparent that inflation is more entrenched, the Fed response is likely to trigger an adverse reaction in equity markets.
Sources:
1https://conference-board.org/data/consumerconfidence.cfm
2https://conference-board.org/data/consumerconfidence.cfm
3https://assets.realclear.com/files/2021/07/1842_ism.pdf
5 https://www.dol.gov/ui/data.pdf
6 https://www.bls.gov/news.release/empsit.nr0.htm
7 https://www2.staffingindustry.com/site/Research/Research-Reports/Americas/July-2021-US-Jobs-Report
8 https://www.bls.gov/news.release/empsit.nr0.htm
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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