The week started with market sentiment concerned about the economy cresting, corporate profits, and the delta variant, only to change course as positive Q2 earnings and revenue surprises continued. During the week, the large-cap indices and the Nasdaq reached new highs. The TSX finished the week gaining 0.94%, the S&P 500 matching the TSX gaining 0.94%, the Nasdaq jumped 1.11% while the S&P 400 mid-cap index advanced 0.51%, and the Russell 2000 increased 0.97%.
According to FactSet, 89% of the S&P 500 companies have reported. Of the reporting companies, 87% show positive earnings surprises exceeding estimates by 17.1%, which is above the 7.8% five-year average earnings surprise. Financials, information technology, and communication services continue to be the most significant contributors to the total increase in the second quarter. Revenues of 87% of the reporting companies exceeded estimates by 4.9%, which is above the five-year average of 1.2%. All eleven sectors reported revenue gains led by energy, health care, and financials, which were the largest contributors to the overall increase in revenues.1
Last Monday, the Institute of Supply Management reported that purchasing managers index or PMI for July read 59.5, which is below forecasts of 61 and below June’s reading of 60.6. A reading above 50 indicates growing manufacturing. The latest reading is down from March’s PMI of 64.7. The latest contraction in the PMI reading needs context relative to the March reading, which is unsustainable, whereas the recent reading is more sustainable. Another point was customer inventories were also down to 25 compared to June of 30.8. A number above 50 indicates growth; however, a number in the 40s is considered acceptable. The lower number in July may signal customer inventories are shrinking. Still, the latest shrinkage could translate into increased or steady demand when re-stocking occurs in the coming months.2
Last Tuesday, the Census Bureau reported factory orders were up 1.5% versus the forecast of 1.0% for June and May’s increase of 2.3%. The recent rise is the thirteenth out of the past fourteen months. Shipments were also up 1.6%, following May’s 0.9%. Another good data point for sustainability is the unfilled orders report which increased 1.0% or $11.5 billion and follows the May increase of 1.0%. Inventories of manufactured durable goods also rose 0.9%.3
Initial jobless claims fell 14,000 to 385,000 compared to the previous week revised to 399,000. The latest number is lower than the four-week average of 394,000. Continuing claims also dropped to 12,975,015, a decrease of 181,251 from the previous week.4 The big economic news for the week was the jobs report for July released on Friday, showing the US added 943,000 jobs in July, exceeding the market analyst’s predictions of 858,000 jobs.5 The unemployment rate dropped to 5.4%. As in previous months, leisure and hospitality and government, notably education, added the lion share of the new jobs. The participation rate also rose to 61.7% in July and is expected to increase in late months as federal supplemental unemployment benefits are scheduled to expire in September. The recovery in labor is accelerating from earlier in the year due to the vaccine and federal stimulus but remains 5.7 million jobs short of pre-pandemic levels. Another contributing factor to the labor shortfall was a wave of 2 million retirements during the pandemic.
After the jobs announcement, the market response was somewhat muted, with the Dow and the S&P closing with small gains on the day and the Nasdaq with a slight loss. The 10-year Treasury yield rose to close at 1.30% after hitting 1.19% earlier in the week. With continued strength in the jobs data, past discussions suggest the Fed will advance the taper date of asset purchases. The last time the Fed tapered asset purchases, the equity markets became unsettled, something the Fed hopes to avoid this time by providing the market significant advance notice of any acceleration of their earlier stated timeline.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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