Global equity markets finished lower for the week. In the U.S., the S&P 500 Index reached record highs during Monday’s session but finished the week at a level of 4,441.67, representing a loss of 0.55%, while the Russell Midcap Index moved -1.57% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -2.47% over the week. International equity performance was also lower as developed, and emerging markets returned -2.94% and -4.61%, respectively. Finally, the 10-year U.S. Treasury yield ticked lower, closing the week at 1.26%.
Last week was full of news stories and market events that would seem to offer conflicting views on the future direction of our economy and the future valuation of the securities markets. Throughout the remainder of this commentary, we will offer our perspective on both the news and how it might affect the direction of the markets.
Many of the Nation’s largest retailers released earnings reports for the second quarter of 2021 last week. Consumers make up 70% of the U.S. economy as measured by gross domestic product (GDP), so these earnings releases, and what they say about the spending behavior of consumers, are important guideposts for the future direction of the economy. The earnings reports were robust with the majority of retailers beating estimates on both the top and bottom lines. Most importantly, many retailers increased their guidance for the remainder of 2021. However, the performance and expectations of the retailers are in contrast to the July Retail Sales data released on Tuesday, as July sales fell by 1.1% from the previous month.
The estimated decline was expected to be just 0.3%. Our analysis of the data leads us to place greater credence at this time on the retailers’ results than the July Sales data. We believe that there are several issues that may have impacted retail sales in July. These include, but are not limited to, the following:
1. Amazon decided to move Prime Day(s) to June this year.
2. The ongoing global shortage of semiconductors affected automobile sales, which were down 3.9% in July.
3. Overall spending may have been pulled forward into May and June due to the re-opening of the economy and Federal stimulus payments.
Another contrast from the week centers around the release of the minutes from the July FOMC meeting on Wednesday. The minutes are typically poured over by investors as they try to determine the Federal Reserve’s future strategy. The minutes focused on the timing and process that the Fed intends to implement in altering their current policy of buying $120 billion of securities on a monthly basis. The “Fed Taper” is the first step in altering the accommodative policy that the Fed has maintained for a prolonged period of time. The most recently released minutes may lead some to believe that this action will take place in either the fourth quarter of 2021 or early in 2022. Interest rates and the equity markets were largely unaffected by the release of the minutes. This reaction is in contrast to the now famous “Taper Tantrum” of 2013 when both interest rates and stock prices went through a period of great volatility following each Fed announcement.
We continue to believe that the nature of the employment picture will be the guiding force for the timing of the Fed’s policy change. Decreasing the unemployment rate to pre-pandemic levels is still a priority that the Fed would like to achieve prior to altering their current accommodative policy through an increase to the Federal Funds Target Rate.
All of these economic developments are important factors for investors to consider when managing their investment portfolios. We encourage investors to work with experienced financial professionals to help build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk. Best wishes for the week ahead!
July Sales Data are from the Census Bureau. Equity Market and Fixed Income returns are from JP Morgan as of 8/20/21. Rates and Economic Calendar Data from Bloomberg as of 8/20/21. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.
Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.