Economic Update 7-12-2021

• During an abbreviated week, economic data included a decline in services sentiment, although the measure remained quite strong. Job openings improved, while jobless claims were mixed—as initial claims rose but continuing claims sustained their decline.

• U.S. equity markets gained slightly last week, outperforming foreign—especially emerging markets which fell back sharply. Bonds in the U.S. and developed markets gained as interest rates continued to fall, surprisingly many investors. Commodities lost ground last week, largely led by declines in the grain complex.

U.S. stocks ended the week positively, despite some late week creeping concerns about growth slowing relative to expectations caused some downward volatility. President Biden also signed a series of executive orders designed to improve competiveness and lower prices in certain industries, including technology and pharma. This didn’t appear to be taken poorly by financial markets, which seem to have adopted the consensus view that antitrust actions may be more difficult or less likely than first feared.

By sector, utilities, consumer discretionary, and technology fared best, up nearly a percent; energy was the laggard, down over -3% for the week with continued volatility in OPEC+ negotiations. Real estate gained over 2% as interest rates continued to tick downward.

The earnings season for the second quarter is beginning, with expectations of continued improvement to a year-over-year rate of 65% (per FactSet). This would represent the strongest quarter since the over-100% recovery in late 2009, and an acceleration upon the Q1 increase of 52%. By sector, it appears earnings growth will be led by energy, industrials, and consumer discretionary, with expected gains well over 200% each.

Foreign stocks were mixed in developed markets last week, with positive returns in Europe and the U.K. offsetting declines in Japan and the emerging markets—notably in Brazil, China, and South Korea. Japan announced a ‘state of emergency’ for the upcoming Olympics later this month, meaning it could be conducted without fans, dampening a potential growth spurt often seen in countries hosting an Olympics, and seemed to threaten sentiment a bit surrounding reopenings improving globally. The spread of the Covid ‘delta variant’ appears to be a concern especially in both Europe and the emerging markets, where vaccination rates are far lower. The Bank of China cut bank reserve requirements, which was seen as less of a monetary policy move, and more of a redirection of credit to smaller companies, as growth there has stalled as of late.

The ECB announced a policy similar to that of the U.S. Fed, calling for a goal of symmetric 2% inflation, which allows for a similar overshoot near-term. This is actually a bolder step than it appears. While the U.S. has experienced moderately high inflation (late 1970s), it’s been nothing like the historical precedent in Europe (Germany in 1920s), which has created a hyper-vigilance about allowing rising prices. Another unique component is the specific mention and inclusion of owner-occupied housing costs in their assessment (the contribution of which would likely raise the measure).

U.S. bonds fared positively, led by strong return for long-term U.S. treasuries as interest rates declined across the yield curve, with lesser positive returns from investment-grade corporates. High yield and floating rate debt saw minor declines. Foreign bonds were mixed, with developed markets rising along with similar declines in yield, and emerging market local currency bonds falling back sharply.

Commodities generally lost ground across the board last week, despite little movement in the dollar, with small gains in metals offset by largely by weakness in the agricultural group. Corn declined -10%, with wheat and others down significantly as well, as improvement in Midwest weather forecasts moderated negative sentiment around crop shortages. The price of crude oil bounced around a bit before ending down nearly a percent to around $74.50/barrel, with no OPEC+ production announcement. Their meeting extension last week was designed to agree upon a higher level of crude production by member states, although political infighting and gaming between countries caused breakdowns, as has happened in the past. Any agreement is based on hopes that more supply would come on board to meet growing consumer demand—and temper prices a bit. Unleaded gasoline has been the unfortunate beneficiary of higher energy prices, right at the time when many are headed out on the road as pandemic restrictions lift.

Unfortunately, many of the dynamics behind the OPEC+ meetings are geopolitical in nature, a regional power struggle of sorts, rather than economic. In this last case, it’s been the UAE contingent asserting independent thinking versus the traditionally dominant Saudi Arabia. Each individual nation has the incentive to produce as much as possible (to maximize their own revenues), while the incentive of OPEC+ as a whole is to find the best balance between high revenues and avoiding oversupply and/or demand destruction from too-high prices. Historically, failed OPEC+ production agreements have been a mixed blessing for oil prices, as not checking agreements that keep production at high levels can oversupply the global market, creating a glut, which can be catastrophic for prices (although not so bad for consumers).

Period ending 7/9/2021	1 Week (%)	YTD (%)
DJIA	0.25	15.05
S&P 500	0.42	17.24
NASDAQ	0.43	14.47
Russell 2000	-1.11	16.00
MSCI-EAFE	-0.07	9.26
MSCI-EM	-2.60	3.22
BBgBarc U.S. Aggregate	0.31	-1.18

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2020	0.09	0.13	0.36	0.93	1.65
7/2/2021	0.05	0.24	0.86	1.44	2.05
7/9/2021	0.06	0.23	0.79	1.37	1.99

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT