July 20, 2021 Commentary

The deep sell off that began last spring as the U.S. and the world went into pandemic lockdown, prompted one of the shortest U.S. recessions from February to April 2020. The Relief Act reversed market declines and boosted GDP. From pandemic lows on March 31, 2020 to reopening highs on July 15, 2021, stocks gained a staggering 59% reflecting optimism that reopening would be steady without interruption.  

However, starting on Friday July 16, 2021, “stocks slumped around the world as investors rushed into haven assets after the delta coronavirus variant cast a pall over the economic recovery, while tension   between the U.S. and China escalated” (Bloomberg News July 19, 2021). Monday’s sell off, dominated by cyclical companies, resulted in the biggest dip in the S&P 500 since May due to fears over new limits or lock downs, with losses in commodities and the financial and industrial sectors, particularly in travel related companies.

On July 10th, 2021, Scott Gottlieb, MD, former FDA Commissioner, tweeted, “Covid cases continue to rise in UK as Delta becomes epidemic, but hospitalizations and deaths aren’t increasing at same rate as past waves, even accounting for lag between cases and hospitalizations; reflecting fact that more of most vulnerable are protected through vaccination.”  Although public health measures will likely be enacted due to the recent uptick of positive cases, we believe the response will be muted in comparison to those previously enacted, because, according to health experts, vaccines should mitigate the impact of the delta variant, especially for the vaccinated.

On Sunday July 18, 2021, The Wall Street Journal highlighted that Americans stepped up retail spending in the month of June, offering a boost to the economic recovery. This 0.6% increase in retail sales, as measured by purchases at stores, restaurants, and online, beat economists’ expectations, particularly since spending had slowed in late spring. 

According to the U.S. Bureau of Labor Statistics, “Total nonfarm payroll employment rose by 850,000 in June, following increases of 583,000 in May and 269,000 in April. In June, nonfarm payroll employment was up by 15.6 million since April 2020 but remains down by 6.8 million, or 4.4%, from its pre-pandemic level in February 2020.”

As we mentioned in our last letter, corporate earnings are key drivers of stock prices, and the Quarter 2 earnings season is off to a good start.  Although only 8% of the companies in the S&P 500 have reported Quarter 2 results thus far, according to Fact Set, “85% of these companies have reported actual EPS (earnings per share) above estimates” and, “in aggregate, companies are reporting earnings that are 22.9% above estimates, which is above the 5 year average of 7.8%.”

We believe these trends in retail sales, job creation, and corporate earnings are reason for optimism that the economy will continue to expand, albeit with some interruption.  We continue to focus on owning quality stocks with reasonable valuations and strong revenue and earnings projections that we believe will provide our clients with future gain.

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