Key Points
– S&P 500 closed at 4,441.67, down from 4,468.00 last week. On Wednesday and Thursday, there was turmoil in markets, but a widespread rally Friday reversed course.
-The Epicenter sectors of Energy, Financials, Materials, Consumer Discretionary, and Industrials all had a tough week, with Energy leading the losses.
– Chinese demand concerns, taper concerns, inflation concerns, and of course, concerns about the Delta Variant all appeared to contribute to this week’s volatility.
– According to RBC, buybacks, and dividends were mentioned 3x more than capital investment on Q2 earnings calls. We discuss how stock ‘yields’ are attracting money to equities.
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Markets had another meandering week, but we hung at levels just below recent all-time highs when all was said and done on Friday. The VIX collapsed almost 15% today and settled well under $20 after its brief foray higher. These forays do appear to be trending toward more temporary and less severe. There is undoubtedly fear in the air. Significant events have been canceled and spreads on bonds widened as the market digested the multitude of risks.
Delta variant may seem to be the main culprit given the palpable fear in the air. Clogged hospitals and tragic deaths continue to permeate the news as the wave reaches what is hopefully a climax in many of the worst-affected states. However, the BofA Fund Managers survey found that the virulent strain was number three behind inflation fears, taper tantrums, and asset bubbles came in at number four. So markets are undoubtedly digesting an uncertain future fraught with risks during a typically challenging
month. Nonetheless, when you try to get yourself into the data and out of emotion and fear, things look quite a bit brighter than they feel, or more “glass-half-full,” as our Head of Research Tom Lee says.
When you look at the actual impact of how Delta affects economic projections so far, it is very meager. Bloomberg economist forecasts only dropped from 6.5% growth to 6.2% growth in 2021. However, an essential consideration in this roughly 4% drop in this annual growth rate in 2021 is that growth estimates for 2022 were raised by about the same amount. So pent-up demand is not being destroyed; it is being postponed.
Looking closer at some earnings, like Target, things seem they aren’t slowing down that much. The company’s management said they saw little change in consumers’ behavior. Their sales also rose about 9% on an extremely tough comparable, given that they were significant beneficiaries of consumer hoarding in 2020 during the Q2. This is encouraging.
We certainly understand how frustrating this situation is. We know that if you are heavily invested in some of our sectors, it certainly doesn’t feel like the market is just under all-time highs. The S&P has hit 43 all-time highs this year, and this is the most since 1995. Remember how scared everyone was in March and April of 2020? The market doubled over the next year, but prominent publications were running articles inquiring whether civilization would completely collapse during the height of the fear.
Inflation is a more significant concern than Delta, and so is tapering. Commodity prices have significantly pared their eye-popping annual gains. Even one of the most hawkish members of the Fed, Robert Kaplan, today said he was reconsidering his aggressive tapering timeline until he could see the full impact of this obnoxious and tragic variant on economic growth. So, that is two positives on those critical risks.
How about asset bubbles? That was one of the other risks in front of the Delta variant, according to fund managers. Furthermore, the sectoral rotations between value and growth have been violent and deep in many cases. This makes us think this risk, while possible, is unlikely. Especially given that earnings growth has been more robust than recent recoveries. Companies are sitting on record amounts of cash and unused credit.
Then the US consumer is as flush as they’ve ever been in our lifetime. They’ve paid down their debts, they’ve been deprived of much of the best life has to offer, and when the all-clear is given, they will meet the robust private sector with open arms. We believe it will be glorious when the consumer and the lean and mean private sector meet uninhibited by healthcare concerns. Indeed, the strength of earnings that primarily reflect a period of low cases gives real-world, recent evidence of this fact.
TSA numbers show only a minimal drop in air traffic, although it is disappointing to see the breaking of a streak of 4 weeks above 2 million. However, current numbers are only slightly below that level. Rental prices on single-family homes went up 7.5%, according to CoreLogic. They increased in every major American city except for Boston and Chicago. If inflation at these levels makes its way into the PCE, it could give more credence to those fund managers who voted they were worried about inflation. This is definitely something we are monitoring.
One interesting observation from RBC Capital Markets this week is that share buyback and repurchases were mentioned in their tally of earnings transcripts three more times than capital investment. Markets probably continue to go higher partially because well over half of the S&P 500 has a better yield when dividends and buybacks are included than midgrade corporate debt.
This means no matter what is going on in markets, a lot of money is continuing to come into the stock market as equity attractiveness relative to fixed income continues to increase. We think generational shifts also help this process along. The recent drop in prices means there are many opportunities; despite the averages being at all-time highs, which is supported by the mega-cap names. Many individual stocks in our favored sectors are trading well below their cap-weighted sector multiples.