The overall U.S. market finished slightly lower the last week of July, but did ultimately finish the month higher – for the 6thconsecutive month (longest winning streak since 2018). In short, this momentum typically suggests more gains ahead in the remaining months of the year. The other positive is that smaller companies outperformed last week.  That’s typically a positive for future market direction.   Also performing well last week (and month) were commodities and Bitcoin.   The laggard was emerging markets, specifically China, and especially so Chinese tech.

  • The new week will start off on the right foot, with stock prices slightly higher and bond yields slightly lower.  This is despite what should seem to be big news that Congress missed its debt ceiling mandate.   A default on U.S. debt (which has never been seen) would be messy, but the Treasury Department did invoke “extraordinary measures” by conducting emergency “cash-conservation steps”.  This will allow the Treasury to pay off the government’s bills for up to 3 months.  The markets seem to like this. 
  • Though the outlook remains positive for the stock market heading into year-end (due to strong economy, supportive liquidity conditions, market technicals), it should be noted that the next three months for the stock market is typically the weakest of the year.  According to Bespoke Investments, and using the Dow Jones Industrial average, whether one is looking at just the last 20 years or 50 years or 100 years of data, the August-October stretch is on average the worst (though it should be noted that returns are still positive on average).
  • The big economic report last week was the GDP report.  It was considered “disappointing”, only showing real (i.e., after inflation) annualized GDP growth of 6.5% in the second quarter.  The primary reasons were due to lower inventories and lower government spending, both of which are expected to increase later this year.   In my opinion, this is a big positive as one investor concern is that the second quarter was going to be “peak growth”, or the highest growth rates we’ll see in this recovery. In other words, while we are expected to have strong above-average growth in the quarters ahead deep into next year, the growth rates won’t be as good.   And all else being equal, the markets don’t like “less good” which is the mirror image of how the markets like “less bad” like when the bull market started off the COVID Crash lows back in early 2020.
  • More tidbits on the GDP report.  Real (inflation-adjusted) GDP hit a new all-time high.  Nominal GDP (baking back in the inflation) grew a whopping 17% over the last year.   Speaking of inflation, GDP prices rose 6.0% (annualized) in the Q2, the fastest pace since 1981.  Noted by First Trust, GDP prices are up at a 2.7% annual rate since late 2019 (which obviously includes the deflation in early 2020) – which is above the Fed's long-run 2.0% inflation target.
  • Some inflation data late last week showed its strongest numbers in 30 years.   The Personal Consumption Expenditures deflator (PCE) increased 0.5% in June and is now up 4.0% from a year ago.  Excluding food and energy, Core PCE increased 0.4% in June and is up 3.5% from a year ago.  More analysis from First Trust: “While the massive impact of shutdowns last year muddy the inflation picture, a look at price pressures over the past six months (which reduces the "base effect" impact), shows an even more profound rise in inflation, with overall PCE prices up at a 5.6% annualized rate.  In other words, inflation also reflects the loose stance of monetary policy in addition to the imbalance in supply and demand.  Since February 2020 (pre-COVID), PCE prices are up at a 2.9% annual rate, which is above the Fed's 2.0% long-term target.”
  • Despite the inflation data, 10-year Treasuries ended the week at 1.24%. 10s closed the prior week at 1.30%.
  • Housing update: home prices hit a record high in May, and mortgage rates hit a six-month low last week.
  • Earnings season: It’s been a great earnings season. Currently, 59% of S&P 500 companies have reported Q2 2021 earnings, with 88% of those companies exceeding their EPS estimates. Also notable, that 88% figure applied to actual revenues above estimates, showing that these positive earnings may not be distorted and represent a strong indication of the growth of the index. The S&P 500 is currently reporting the highest year-over-year growth in its earnings since Q4 2009, according to Factset. Most notably, large earnings-beat percentages are coming from companies in the Financials, Info Tech, and Communication Services sectors.
  • Fed and Interest Rates: Jerome Powell and the Fed announced their decision to leave the benchmark lending rate unchanged at 0-0.25% last Wednesday, citing that “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.” This decision does not come at a surprise as emergency pandemic measures are soon set to expire, including additional unemployment benefits and the Fed’s bond repurchasing program.
  • COVID, of course, remains a key potential economic and market risk. Market participants seem to believe that it won’t impact the economy as it did in 2020, but the trends aren’t moving in the right direction yet. It should be noted that market leadership changed (from securities benefiting most from the economy re-opening to those benefiting the most from economic restrictions/lockdowns) during mid-June when COVID numbers started to increase.  The numbers are still increasing. NYT COVID Website.
  • Speaking of risks to the economy, one that is often mentioned is cybersecurity. And, according to some analysis (source: Jamilov et al. 2021), by the end of 2020, cyber risks were talked about in 5% of all quarterly corporate earnings calls.   In 2013, it was only 2% of the time.  Doesn’t sound like much, but if it’s on an earnings call, it’s because the company was either attacked or made major investments to protect against them, or both!
  • Bitcoin: Despite many politicians and government agencies pushing for increased crypto regulation, Bitcoin was able to get back above $40,000 for the first time since May. Although it’s often difficult to pinpoint the causes of BTC’s price movement due to its nature of high volatility, perhaps the proposition of increased regulation is leading to increased institutional buy-in therefore strengthening the currency.
  • What to look for next week?  First, the US Senate is expected to pass a bipartisan $1T infrastructure bill. Second, arguably the biggest report of each month, the monthly jobs report, is this coming Friday. This week, look out for Federal Reserve speeches titled “Outlooks, Outcomes, and Prospects for US Monetary Policy” on Wednesday, followed by an update on the potential of a Central Bank Digital Currency on Thursday. The latter could lead to a more regulated crypto market in the US, which comes along with recent proposed legislation regarding the taxation of cryptocurrencies. Increased regulation typically leads to increased stability, so crypto volatility will be of pique interest as more of these plans come to fruition.
  • At Orion/Brinker, we have a lot of Chartered Financial Analysts (CFAs) and current candidates to get the credential.  It’s not easy to get.   It’s a multi-year process with some grueling exams.  In fact, this past Level 1 exam (there are 3 to pass), only 25% passed!
  • On this week’s episode of Orion’s Weighing Machine, I had one of my favorite people in the industry on, Skip Schweiss.   Skip’s experience is big-time, including having an impact on the major legislation on our industry over the last decade. 
  • For more resources on the economy and markets, including partner content, please review the  OPS Financial Advisor Success Hub.
  • As always, please let me know if you have any feedback or questions: rusty@orion.com. You can also reach out to benjamin.vaske@orion.com, as Ben also contributes a big chunk of these weekly notes.  
Have a great week!  

The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.

The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.