Pay Up

Pay up.  Stocks fell on Friday in response to mixed economic numbers.  Retail sales surged beyond expectations because prices of goods are rising.

N O T E W O R T H Y

New old worries.  I have written before that stocks are always in search of something to worry about.  I want to clarify that I am not implying that those worries which are found are unwarranted. Rather, it is important to remember that, these days, investors must remain ever vigilant on a daily basis.  So let’s run down some of the things that are currently vexing the plans of those investors who hoped to laze through the hazy days of summer. We start with the oldest one first.

I know that we all know this, but COVID-19 is still here.  A big jump in vaccines earlier in the year meant that many shuddered businesses were reopened for business with the aggressive relaxing of restrictions.  That was the basis for the recovery which we are experiencing in corporate earnings, price rises (more of that in a minute), and a general feeling of confidence.  All good, except for one basic challenge: the vaccination rate.  While the US is in the top tier amongst other countries in vaccination rates, there is still roughly half of the population that is not yet fully vaccinated.  That makes 1 in 2 people more vulnerable to the latest COVID-19 Delta-Variant, which spreads more aggressively than the one we dealt with last year.  The health impacts aside, the very real numbers suggest that we can expect a rise in positivity rate in the months ahead as we head back to our normal, pre-covid, non-socially-distanced lives.  Remember that transmission rate in virology is highly predictive, so when experts say that we can expect a jump, we typically get one.  The good news, if you could call it that, is that many of the newly reported cases are in a younger age group which is less subject to the life threatening effects of the virus, so the death rate is likely to be lower than in past surges.  The big question which remains in the backs of all of our minds is: will this latest surge bring us back the economic-growth-killing lockdowns?  For now, the most aggressive local government response has been to step up vaccination campaigns and by adding indoor mask mandates for both vaccinated and unvaccinated.  While mask wearing is not enjoyable, it is not likely to cause a replay of last year’s economic calamity.  Still, the markets are on edge and any big spike news is likely to cause market volatility.

Just when I thought it safe to announce that the market no longer cares about inflation… well, you know how this one ends, but let’s go through it for a minute. The Fed, along with many economists have been calling these latest jumps in inflation: transient.  So, no worries and, more importantly, no reason to rush into not only pulling away stimulus, but also adding restraints to tackle inflation. Some recent numbers suggest that surging commodity prices have peaked and that they are starting to head to (they are not there yet) their normal levels. That said, supply chain challenges still exist in not only logistics, but also production as many companies are still faced with a lack of critical electronic and semiconductor components, expected to last through at least 2021 into 2022.  Labor is tight, which means that labor costs are going higher and most economic models show that increasing labor costs ultimately lead to higher prices for consumers.  The effects of those rising input costs may already be evident for consumers.  Typically, companies attempt to absorb jumps in their costs, passing them along to consumers as a last ditch effort in order to maintain healthy profit margins.  Last Friday, Retail Sales figures came out higher than expected, reporting a monthly growth of +1.3% after stripping out the recently surging Automobile sales.  While, on the surface, the number may appear to relay a healthy growth, the underlying reality suggests that actual sales volumes fell for the month as the gains came for unit price increases.  Yep, that means that price increases, AKA inflation, is responsible for the growth in overall sales.  Ok, so what do consumers think about all of this? To find out, we need only to turn to Friday’s University of Michigan Sentiment number which came in well below economists’ estimates in both current conditions and future expectations.  The results also show that respondents are expecting inflation over the next year to be 4.8%, higher than economists expected, and indeed, higher than last month’s survey.

Finally, we are at the start of earnings season.  Not just any earnings season.  This is the one which is expected by analysts to reflect the biggest reflation increase in sales and profitability. According to expectations, analysts are looking for a +62% increase over last year this time. That is not surprising considering that the 2nd quarter of last year marked the low point for many companies.  That said, those big gains are largely priced into the… well, rather pricey market, and expectations are extremely high. This suggests that not only will earnings misses be punished harshly, but meeting expectations are likely to go unrewarded, if not punished as well.  Analysts and investors are watching closely for what has become to collectively be referred to as peak earnings growth.  This goes hand-in-hand with the peak economic growth which has been haunting the markets over the past few months.  Investors are beginning to worry that the recovery trade may have hit its peak.  Add to that continued worries over the Fed’s response to recent inflation figures along with a surge in Delta-Variant Covid, and you have a recipe for market volatility ahead.  So much for those lazy hazy days of summer.

THE MARKETS

Stocks dropped on Friday on economic numbers which suggest that inflation is here and that consumers are concerned about it.  The S&P500 fell by -0.75%, the Dow Jones Industrial Average erased -0.86%, the Nasdaq Composite gave up -0.86%, and the Russell 2000 Index dropped by -1.24%.  Bonds fell on Friday as well and 10-year treasury yield remained unchanged at 1.29%.  Cryptos had a slight rise owing to a +0.26% climb in Bitcoin.

NXT UP

– NAHB Housing Market Index (July) is expected to have risen to 82 from 81.

– The Fed is done talking for now. They are in a black out period ahead of next week’s FOMC meeting.

– AutoNation and Tractor Supply both topped estimates this morning.  After the closing bell we will hear from IBM, Crown Holdings, PPG Industries, and Steel Dynamics.

– Lots of earnings this week along with housing numbers, regional Fed reports, Leading Index, and flash PMIs.  Refer to the attached earnings and economic release calendars for details.