Conway’s QuickTake: Week of July 5, 2021
Here’s What Happened Last Week:
Major large-cap indices advanced again, as the S&P 500 Index and NASDAQ Composite reached new highs. Both indices also closed out June with their fifth consecutive positive quarter. Within the S&P 500 sectors, technology was the clear leader given strong returns from the sectors largest components – Apple, Microsoft, and Nvidia. These three companies make up nearly half of the entire sector’s composition. Energy stocks lagged despite crude oil prices that rose last week. Some companies felt the pressure as OPEC+ works to loosen restrictions on crude production. Large-cap stocks beat small-caps and growth led value last week. In the second quarter, growth steadily reduced the disparity for the year between styles as large growth rose nearly 12%. Value and small-cap stocks maintain their general lead for the year thus far. Johnson & Johnson stock rose handsomely on Friday after it reported its COVID-19 vaccine proved largely effective against the new “delta” variant, which has stirred up some global fear recently.
On Friday, the Labor Department reported that 850,000 nonfarm jobs were added to the economy in June, well above estimates of 700,000 and the largest monthly gain since August 2020. Despite this growth, many more Americans entered the job market which ticked up the unemployment rate slightly to 5.9% from 5.8% in May. Weekly jobless claims fell to a pandemic-era low of 364,000. The consumer confidence index, maintained by the Conference Board, reached a 16-month high level. This is the highest level since February 2020, indicative of consumers’ positive spirits. They may also have received a boost after the amount of home sales rose nearly 8% in May, despite expectations for a slight decrease. The U.S. has won international backing for a global minimum tax rate as proposed by the Biden administration to increase revenue and spending budgets. Officials from 130 countries met virtually and agreed to independently propose new laws in each country. Each individual nation would have the task of passing laws to tax any company with a local headquarters at least 15% in each nation they operate in, minimizing any opportunities for tax avoidance.
Most international equities fell in contrast to domestic stocks. Developed markets marginally outperformed emerging as represented by their MSCI indices in U.S. Dollar terms. European stocks lagged following fears that inflation would lead to rate increases. Also, the number of new coronavirus cases rose for the first time in 10 weeks and spooked investors. Unfortunately, this led government officials to impose curfews and renewed travel restrictions. Japanese equities were negative as new concerns surfaced focused on a new spike in coronavirus cases. Restrictions in Tokyo are set to expire on July 11th, just twelve days before the start of the Olympics. Authorities are contemplating whether to enforce new rules that would limit spectators. Chinese equities also fell last week, largely due to the decline on Friday. This came the day after China celebrated the 100th anniversary of the country’s Communist Party on Thursday.
Eurozone government bond yields fell after European Central Bank President Christine Lagarde warned the risk that the new delta variant poses if it gains momentum in Europe. Only the Johnson & Johnson vaccine is believed to assuredly provide protection against it at this time. Similarly, the Eurozone’s consumer price index representing the inflation level fell to 1.9% in June from 2.0% in May. This is now in the ECB’s target zone of “below but close to 2.0%.” Japan’s economic news was mixed. On one hand the Tankan survey indicated the economic recovery was broadening as investor sentiment levels rose. However, the unemployment rate rose to 3.0% from 2.8% the month prior. The new level is the highest since December 2020. The Chinese June PMI readings were mixed depending on the sector measured but remained largely expansionary, hinting that the Chinese recovery is alive and well. An interesting real estate dynamic is brewing in Shenzhen, China. Home prices have skyrocketed for years, making many homes unaffordable. However, in May home prices retreated indicating government regulation measures may be paying initial dividends.
Treasury curve yields declined last week. The benchmark 10-year bond yield closed Friday at 1.43%, about 9 bps lower than the prior week. The declines contributed to strong returns in the bond market. Investment-grade corporate spreads tightened last week, largely due to technical support. Lower levels of new issuance and strong quarter-end buying activity contributed to higher investment-grade returns. High-yield funds also appreciated despite the new variant and inflation concerns. The consensus expectation among investors is for the Federal Reserve to begin paring the rate of bond purchases this year and potentially raise interest rates by 2023. This is complicated by the recent concerns of excess inflation and consequences it may have. Municipal bonds rose, supported by continued amounts of inflows. Last week, many July 1st coupon payments were automatically reinvested which boosted the level of inflows. The Bloomberg Barclays Municipal Bond Index rose 0.2%.
Tuesday, July 6, 2021
•US Non-Manufacturing ISM Survey
Thursday, July 8, 2021
•US Jobless Claims
•China CPI YoY
•China Purchasing Power Parity YoY
Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, GS Weekly Market Monitor
Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. The Hang Seng Index or HSI is a market capitalization-weighted index of the largest companies that trade on the Hong Kong Exchange. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.