Tag: Weekly

The market capitalization of the major American indices S&P 500, Dow Jones and NASDAQ 100 over the past week increased by 0.5%, 0.6% and 0.7%, respectively. On Wednesday, following the publication of the Beige Book, major indicators closed the session near record levels. The document says that economic activity in the United States from early April to late May grew at a moderate pace, slightly higher than earlier this year. However, the next day, the market corrected on positive data on initial claims for unemployment, which continue to decline and update the minimum levels before the pandemic. On Friday, an important package of May data on the US labor market was released. The statistics turned out to be worse than expected, which was greeted with optimism by market participants. Weak numbers indicate that the labor market is far from ideal, so the Fed should not tighten monetary policy prematurely.

The S&P 500 hit all-time highs on Thursday, testing the 4,545 mark. By the end of the week, the broad index added 0.6%. The Nasdaq 100 continued to hit its highs on Friday. As a result of the trading session on the last day of the week, the technological index capitalization increased by 0.21% to 15,653 points. The indicator gained 1.6% over the week. Despite a correction in the first half of the month, August was successful for both the S&P 500 and the Nasdaq 100, which rose 3% and 4%, respectively. September is historically considered a weak month for the US market, as it is in this month that the S&P 500 is least likely to reach its historical highs. However, if the broad index at least once in September showed its maximum value, then its dynamics at the end of the month turned out to be positive. Thus, the historical marks reached on Thursday may statistically indicate that this year’s S&P 500 negative seasonality in September can be ignored.

The week ended in a positive way. The S&P 500 broad market index rose 1.5%, while the capitalization of the Nasdaq 100 increased 2.3%. Both indicators renewed their historical highs again. Investors are encouraged by the fact that the rate of spread of the delta strain may have peaked, followed by a decline. Fed spokesman Ballard said that data on an increase in the number of vaccinated citizens amid the spread of a new strain of coronavirus is good news, noting that the increase in the number of new infections will peak at some point, after which it will decline. The estimate of US GDP growth in the second quarter was revised upward. The U.S. economy expanded 6.6% in the second quarter of 2021 at an annualized rate. Preliminary data estimated a 6.5% rise.

US indices are renewing all-time highs amid continued ultra-soft monetary policy from the Fed and an excellent corporate reporting season. Now, more than 90% of American companies included in the S&P 500 index have already published their reports, while the results of more than 95% of issuers have exceeded market expectations. Against the backdrop of low bond yields and improved EPS estimates for the next quarter, US stocks continue to retain their investment appeal. As long as this situation persists, investors remain long, buying out any correction. Markets can remain irrational for long periods of time, but perpetual growth is unlikely. Investors should watch more closely three macro factors that could change the favorable investment environment.

First, it is worth considering the risks of a slowdown in US demand growth. The first half of this year saw a staggering increase in demand, fueled by both fiscal stimulus and the easing of restrictions related to the Covid pandemic. The statistics for the second quarter confirmed this thesis. Personal consumption of Americans in the last quarter grew by 12% compared to last year, and the growth in demand for services has finally caught up with the consumption of goods. At the same time, it should be noted that the figures on the dynamics of quarterly GDP did not reach the market consensus, since the accumulated reserves were directed to meet the increased demand, and not the products of new production.

We are not saying that the US economy will slow down, but, on the contrary, we predict that growth in the US should remain above average for some time and this situation is unlikely to interfere with the bull market as a whole. It is no secret that financial incentives in the United States will soon be phased out, but the purchase of assets from the market will be replaced by a multi-year government program to support the national economy. A $ 1 trillion infrastructure plan was recently adopted, and a $ 3.5 trillion social program is under discussion. However, the slowdown in the US economy is a wake-up call that will put pressure on corporate earnings, so investors should pay more attention to defensive stocks versus cyclical names.

Secondly, the increase in wage costs remains an alarming factor. The US has seen strong growth in labor demand as the economy recovers, coupled with limited labor supply due to persisting constraints coupled with generous unemployment benefits and fears of a new wave of morbidity. Vaccinations and the phasing out of support programs during a pandemic should provoke an increase in the supply of labor, which will soften the pressure on wage growth. However, we doubt the offer will be able to catch up with the surge in job growth. And even if the new supply on the labor market does allow for a temporary cushion of wage growth, this is unlikely to last long. In the long term, we expect its growth. Why is it important? Labor remuneration is the most costly item for almost any company, so rising wages will put pressure on corporate profits, unless, of course, this factor is offset by higher labor productivity, which is unlikely in the current environment. The increase in wages is a pro-inflationary factor, so it can also lead to adjustments in monetary policy.

Third, there is now more and more news and rumors about the normalization of monetary policy in the United States. Fed officials first spoke about scaling back the asset purchase program in June. Minutes FOMC following the July meeting of the regulator showed the market that most of the 19 representatives of the Fed are considering reducing the balance soon. With the latest labor market data ahead of the market consensus, the Fed is likely to consider focusing on inflation. However, a factor of uncertainty associated with the spread of the delta strain may delay the decision to tighten until the end of the year. Thus, the $ 120 billion asset purchase program can be extended until December, and interest rates will increase no earlier than December 2022. The main risk for equities is that expectations of monetary policy normalization will lead to higher yields on government bonds, making bonds a more attractive alternative to equities. To minimize the risks of rising interest rates, investors should avoid long duration in bonds in favor of moderate ones, and stick to value stocks that pay good dividends instead of growth stories.

Summing up, let us repeat the thesis that markets can remain in an irrational state for a long time, and it is almost impossible to predict a reversal or trend change. However, it is possible to prepare for a new cycle of US monetary policy and minimize market risks. In the upcoming paradigm, defensive stocks look preferable over cyclical stocks, as well as value stocks over growth stocks. In general, investors are better off taking a moderate position in stocks versus bonds. Finally, for fixed income instruments, it is better to stick to a moderate duration versus a long one.

Last week, the S&P 500 Index declined 0.6%, while the NASDAQ 100’s capitalization fell 0.3%. Investors remain positive about rising corporate profits, but concerns about the spread of the new strain of coronavirus continue to weigh on market sentiment. The week started with weak statistics from China. Retail sales figures for July turned out to be significantly worse than expected, which spoiled the mood of investors. The Chinese market continues to be under pressure due to ongoing reforms. On Friday, it became known that the PRC authorities have approved a bill that toughens the rules for the treatment of companies with personal data.