The equity markets struggled last week, finishing the week lower. Small and mid-caps felt the brunt of the decline while large caps of the S&P500 held up better after hitting all-time highs last Monday afternoon. Energy stocks were the weakest of the S&P 500 sectors. There were several concerns facing investors as the week progressed. The Fed released meeting minutes from its July meeting during which 19 of the Federal Reserve members agreed that progress had been met in terms of inflation and the employment goals were close to being achieved. Further, it was felt the timeline of tapering asset purchases could be accelerated to the end of this year rather than later in 2022, causing investors to worry about a repeat of the 2013 “taper tantrum” when the equity markets responded with a significant decline.1 By Friday, data released during the week indicating economic growth could be slowing and the potential effects of the delta variant gave hope the Fed would consider delaying the taper. The Chinese government clampdown on tech companies has created a great deal of uncertainty in the tech sector. The other sectors are facing additional regulations impacting investor appetite for Chinese securities.
The Canadian TSX and the S&P 500 both declined 0.59% during the week, the Nasdaq lost 0.73%, the S&P 400 mid-cap index dropped 2.04%, and the Russell 2000 fell 2.50%. In Europe, France’s CAC dropped 3.95%, Germany’s Xetra declined 1.14%, Italy’s FTSE MIB fell 2.78%, and the UK’s FTSE 100 lost 1.84%. In Asia, Japan’s Nikkei 225 dropped 3.45%, while China’s Shanghai Composite retreated 2.5%, and the CSI large-cap index slipped 3.6%.
Last Monday, a disappointing New York Empire State factory index fell to 18.3 points in August after a record-breaking high in July of 43. A number above zero implies an improving economy. A survey of economists by Econoday expected a reading of 30 after the index climbed 25.6 points in July to the record 43. The New-Orders index fell to 14.8, dropping 18.4 points, while new shipments plummeted 39.4 points to 4.4. The inflation index of the survey increased 6.6 points to a record-high 46 points. However, the business outlook increased 7 points to 39.5 while future capital spending lost 3.3 points to 23. The general business sentiment remains positive.2
Last Tuesday, retail sales ex-autos for July fell 0.4% for the second time in three months. Including autos, retail sales fell 1.1% last month. As the government stimulus checks fade into memory, it was anticipated that spending would slow down. However, spending is up 16% over the previous year and higher than before the pandemic. As the Covid restrictions became more relaxed, more people shifted spending to services from spending on goods. Additional restrictions arising from the delta variant, such as vaccination passports, will provide a headwind to a fully re-opening of the economy and the expectation is that the pace of growth may have peaked.3 Also, on Tuesday, the Federal Reserve reported the seasonally industrial production gained 0.9% in July. The gain for July was the fastest pace since March and, in part, can be attributed to auto production up 11.2% due to the cancellation of the summer shutdown. The increase in auto production helped push manufacturing activity up 1.4% in July. Capacity utilization also climbed to 76.1% in July, reading near the pre-pandemic February 2020 reading of 76.3%.4 While manufacturing continues to recover, it will slow after the boost of pent-up demand slowly fades, and more normal spending habits return.
On Wednesday, the US Census Bureau reported a 7% decline in housing starts from the revised June number; however, building permits were up 2.6%. Regionally, starts in the south were up 2.1%, contrasting a 49% decline in housing starts in the Northeast. Multifamily permitting jumped 11%, with the West enjoying a 13% increase and the South a 1.9% decline for the month.5
The Labor Department’s initial unemployment claims were 348,000 for the week ending August 14. The latest claims number declined 29,000 from the previous week’s level. Continuing claims decreased 311,787 to 11,743,515 from the previous week compared to 28,676,558 for the comparable week last year.6
Although the pace of growth may have peaked, the economy is showing strength and it will continue. Future growth in part will be fed by resolution of the challenges presented by bottlenecks and supply chain disruptions as we press forward from a historic pandemic event.
4 https://www.marketwatch.com/story/u-s-industrial-output-picks-up-in-july-11629206935?mod=economic-report; https://ycharts.com/indicators/us_capacity_utilization_total_industry
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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