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Market Commentary for the week ending June 26th, 2021

Summary

  • Stocks surge to record highs lead by riskier small stocks.
  • Home sales are slowing and showing signs that the surge following COVID may have peaked.
  • It has been a robust quarter for the U.S. economy and signs point to continued strength.

 

This Week’s Performance Highlights

Market Indexes week ending June 25, 2021

Source: www.YCharts.com

  • Stocks staged a widespread rally with all of the major indexes pushing to record highs following relatively sharp declines the week before. At the close of the week large U.S. stocks were higher by +2.7% as measured by the S&P 500. The Dow Industrials posted and even stronger performance gaining +3.4% for the week but still lagging the S&P 500 for the full year. The NASDAQ Composite, a tech-heavy index, hit record highs as well but gained just +2.4% on the week.
  • More than 91% of all S&P 500 stocks were higher, 457 of the 500 stocks, a sign of the broad strength in the market.
  • Every sector was higher as well with riskier energy stocks surging +6.7% bringing their year-to-date gain to a whopping +49.0%! As showing in the accompanying table, in spite of the huge 2021 gains, many of these stocks remain far below their all-time highs. Financials were the second best sector of the week jumping +5.2% helped by bond yields moving higher.

    Week’s Top Performing Energy Stocks

    Source: www.YCharts.com

  • Small U.S. stocks were the standout winners jumping +4.6% for the week and now higher by +18.9% in 2021 compared the large stocks up just +14.9%. As illustrated in the below graph, the performance of small stocks has topped that of large stocks for nearly all of 2021.

    large U.S. Stocks versus Small U.S. Stocks

    Source: www.YCharts.com

  • International stocks were higher as well but lagged behind the performance of U.S. stocks. Developed country markets on average gained +1.9% for the week. Eurozone markets performed the best while Japan and Australia lagged a bit behind.
  • Emerging markets were higher by +2.3% helped by the biggest, China, rallying +3.4% but up only +1.8% so far for the year.
  • Two of the three non-traditional asset classes have posted 2021’s biggest gains of all the asset classes we follow, real estate and commodities, up +24.9% and +28.9% respectively, while gold is down -6.6% for the year. This is conflicting performance for those thinking inflation will be with us for some time as all three tend to perform well during periods of rising inflation. This week all three added to their gains.
  • Bonds were the only major asset class losing value this week with prices down -0.4%. In another sign of investors’ appetite for risk, riskier high-yield bonds actually posted gains while U.S. Treasuries, the safest of all bonds, declined.

Interesting Numbers

+8.3%

The second quarter is coming to an end this week and it is expected to have been a very strong one for the U.S. economy. According to the Federal Reserve Bank of Atlanta’s GDPNow estimate, based upon known economic reports so far during the second quarter, it is expected that U.S. Gross Domestic Product (GDP) grew by a massive +8.3%! If the economy grows at this pace, it will be the second fastest quarterly growth in more than 50 years just behind the third quarter of last year following the initial rebound from the onset of COVID.

1.10

Retailers have less inventory today relative to their sales than at any point in 30 years. According to data from the Federal Reserve, retailers’ Inventory to Sales Ratio, the green line in the accompanying graph, is the lowest it has been since they have maintained this data falling to just 1.10 in the most recent month. The ratio for all business, the blue line, is at 1.26, just shy of an all-time low. This is the result of rapidly improving sales and the challenge businesses are facing getting product to sell. Businesses rebuilding inventory to more normal levels, assuming they do, will continue to fuel economic growth.

Inventory to Sales Ratio

Source: https://fred.stlouisfed.org/series/RETAILIRSA and https://fred.stlouisfed.org/series/ISRATIO

Economic Indicators

769,000

Sales of new homes disappointed with the annualized pace coming in at 769,000 versus an estimate of 859,000. This was the slowest month of the last 12 with sales now up just +9.1% year-over-year. Regionally sales varied greatly with the South being the only region that was lower while the Northeast saw the sales pace increase by +33%. It is widely believed by economists that the only thing holding back sales are constraints in supplies to build new homes.

5.80 million

Existing Home Sales also slowed slightly in the most recently month coming in at 5.80 million annualy versus 5.85 the month before. This represents the fourth consecutive month of slowing sales with some starting to ask if the wave of Covid-induced buying may have crested. A lack of inventory, similar to new homes, and rising prices are two factors that may be causing buyers to tap the brakes. The accompanying graph shows sales currently running at a pace nearly identical to pre-COVID.

Core CPI Year-Over-Year Change

Source: www.yCharts.com

+2.3%

Durable Goods Orders, orders for longer lasting goods such as autos and refrigerators, resumed growth in May climbing +2.3% after having fallen -0.8% the month before. Although the month’s gain was a bit less than expected this disappointment was offset by a revision higher to the prior month’s number. Again, much like the housing market, a shortage of inputs, such as computer chips, is being blamed for holding growth below what is believed to be its full potential.

Unchanged

Consumer Spending came in below economists’ expectations essentially unchanged in May compared to the prior month although the prior month’s report was revised higher to +0.9% from +0.5%. What consumers are spending money on has been shifting with more spent on travel and eating out and less on goods. Consumers to remain flush with cash and an apparent desire to spend but the elimination of stimulus money may cause some to be more discerning about their purchases.

411,000

Initial Jobless Claims inched lower in the most recent week coming in at 411,000 compared to 418,000 the week before. This was a welcomed improvement but the improvement in the rate of claims has stalled in recent weeks.

Upcoming Economic Reports

  • Monthly Employment Reports
  • S&P CoreLogic Case-Shiller Home Price Index
  • Consumer Confidence Index
  • Motor Vehicle Sales
  • Initial Jobless Claims

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