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A strengthening economy is behind the markets’ recent moves
- Pharmaceutical giant Merck spurred a late-week rally but markets still closed lower for the week.
- Consumer spending rebounds suggesting the third quarter ended strong.
- The benchmark 10-Year U.S. Treasury Yield crossed back above 1.50%
This Week’s Performance Highlights
- This week wrapped up the month of September marking the worst month for stocks since the onset of COVID in March 2020. Rising bond yields, concerns about the continued spread of COVID, and higher inflation are weighing on investors.
- At the close of the week large U.S. stocks, as measured by the S&P 500, were down -2.2% helped though by a big rally on Friday that wiped out about one-third of the prior 4 days loss. The Dow Jones Industrials fared worse down -2.7% and the tech-heavy NASDAQ Composite even more so down -4.0%.
- Small U.S. stocks held up better than large down just -0.4% but still lag the performance of large stocks year-to-date up +14.1% compared to large stocks being higher by +17.3%.
- Pharmaceutical giant Merck (MRK) released results from a phase 3 trial saying that it has developed a pill that reduces the risk of hospitalization or death by around 50% in COVID patients. This sparked an overall market rally including a spike higher in Merck’s stock by more than $6 adding approximately $16 billion in market value to the company.
- Every sector was lower except energy stocks that rallied +5.8% due to higher oil and natural gas prices. Technology stocks were among the worst performers as the stocks of these higher growth companies are expected to be challenged the most by higher bond yields and interest rates.
- International stocks overall performed worse than the U.S. markets this week continuing the trend of 2021. Developed markets were down an average of -2.6% for the week with stocks in Japan suffering the steepest decline off -3.8%.
- Emerging markets did better still turning in an average loss of -0.9%. Losses in many countries were offset by gains in both China and Hong Kong, up +1.0% and +1.2% respectively, but still lower for the year.
- The alternative asset classes turned in relatively good performance with two of the three, gold and commodities, higher for the week while real estate stocks slipped. Year-to-date these three asset classes have added to the value of a diversified portfolio with real estate and commodities up big and commodities off single digits.
- Bond prices closed the week lower by -0.2% as yields moved higher. The yield on the benchmark 10-Year U.S. Treasury reached above 1.5% before declining late in the week to close at 1.463%. As the accompanying graph shows, the 10-Year Treasury yield, the blue line, has been volatile this year. The rapid rise in rates earlier in the year did cause stocks to pause (the orange line). We’ll see if the current yield rise will have a lasting impact on stock or if they will resume their march higher.
According to a Bloomberg opinion piece, the housing bubble in China puts all others to shame. Data from the United Nations and Financial Times estimates China has enough EMPTY apartments to house 90 million people! The massive amounts of building in China have driven real estate to be 30% of China’s total economy compared to just 19% in the United States. Furthermore, housing makes of 78% of the typical Chinese households’ assets versus just 35% for the average American.
The average U.S. household’s allocation to stocks (equities) currently stands at 50.9%. This is the highest reading since data has been tracked by the Federal Reserve with one exception in the late ‘90s when it hit 51.8% (orange line). This is interesting because higher levels of stocks in the average household’s portfolio have resulted in lower returns for stocks in the decade that follows (green line). All of this is to say that, if history is any indication, today’s large ownership of stocks by they typical household suggests stock price gains in the coming 10 years could be much lower than we have recently experienced.
Consumer Spending: +0.8%
Growth in personal income slowed in August climbing just +0.2% compared to +1.1% the month before but this had little impact on Consumer Spending that jumped +0.8% during the same time compared to a decline the month before of -0.1%. People spent more money on food and drinks and recreational items and less on autos and parts primarily due to shortages of inventory.
Although spending was robust for the month, growth would have been only half the reported level when factoring out our high inflation. Regardless, this report was welcomed news as some feared the wave of COVID cases could cause consumers to pull back.
Durable Goods Orders: +1.8%
Orders for durable goods, longer lasting items such as cars and appliances, rose much faster than economists expected gaining +1.8% for the month. This marked the sixth consecutive monthly increase helped in large part this month by orders for airplanes. When factoring out the transportation sector, orders were up only +0.2%. If it were not for supply shortages and challenges finding skilled workers, it is believed durable goods orders would be even stronger.
S&P Case-Shiller Home Price Index: +19.7%
During the past 12 months housing prices have risen at the fastest pace in at least three decades. According to the S&P Case-Shiller Home Price Index prices nationally are up +19.7%. This eclipses the previous high of +14.5% in late 2005 just before the housing bubble burst and prices declined sharply.
There are big differences though between today’s market and that in 2005. The years leading up to the 2008 Financial Crisis were fueled in large part by subprime lending. Today’s price increases are instead the result of too little supply and high demand resulting in bidding wars for many homes.
Consumer Confidence: 109.3
Consumer Confidence disappointed coming in at a reading of 109.3 as compared to 115.2 the month before. Economists had been more hopeful with an estimate of 114.9. This September reading was the second consecutive decline driven by concerns about the spread of COVID and high inflation.
Upcoming Economic Reports
- Employment Report
- Factory Orders
- ISM Services Index