Return to the COVID Economy? No, Just Kidding
Markets sold off last Friday and continued the trend on Monday of this week as fears arose over a decline in global growth due to increasing COVID cases. A few stocks that were darlings of the lockdowns benefited. Tuesday and Wednesday the market bounced back as if global growth was just fine and investors turned their attention back to cyclicals. At this point, the market kind of feels like we're on a roller coaster of misdirections - or, is it just "misinformation?" If investors were part of the movie "Fletch," I'm not sure if they would be Fletch who has been discovered not to be a member of the club, or if investors are the Underhills who've been stuck with a tab that doesn't belong to them. Either way, it's been an interesting week for market action. Here's what we're seeing so far...
To COVID or Not To COVID, That is the Question. A recent rise in cases was decided on Friday of last week and Monday of this week to be a serious threat to global growth, forcing the market lower by 2.3%. Why? Global cases of COVID had increased 8% during the week last week, according to the 7-day average. In a complete turnaround, the market has recovered nearly 100% of those losses in just two days. Why? Not sure. Nothing has really changed this week. Global cases are up 5.8%, using the 7-day average, above last week's number. The reality is that the new Delta variant is less fatal than the original strain. As a result, hospitalizations and deaths are not corresponding like the resurgence of COVID in the Fall of 2020. We've talked at length about how viruses mutate and lose strength over time. The graphic below shows that the fatality numbers and hospitalizations are much lower during this most recent rise in cases when compared to the rise last Fall. When put into context, this is important, because only 46% of states were re-opened last Fall during the surge while nearly 100% are fully re-opened now. Bottom line - there shouldn't be any concern over global growth...at least not due to COVID.
Earnings Gain Attention Once Again. This week has provided some positive news on the corporate earnings front that investors can finally focus their attention on. One of the things I love about earnings is that financial media can't distort the numbers much - they are what they are. So far this week (19th through the 22nd), of the 179 companies that have reported 2nd quarter earnings, 86% have either exceeded or met analysts' expectations - which were already lofty. IBM shares are up this week as the company reported revenue of $18.75 billion, up 3% from a year ago and earnings exceeded expectations. The company had better-than-expected growth in both cloud and cognitive software. Johnson & Johnson shares are up this week as the company reported earnings 8.3% higher than analysts' expectations and revenues were up 27.1% from the same quarter last year. It hasn't been all rosy, as Netflix reported lower-than-expected earnings and the lowest quarterly total of new paid subscribers yet. Despite the announcement of gaming options available in the app/interface, the company said that the recovery in subscribers would take longer than the street expects. Next week will be another key week for earnings with the other members of FAANG reporting. One note of interest, 87% of S&P 500 companies tracked by Bloomberg have mentioned inflation in conference calls so far in July.
Economic Releases Disappoint, But Overall Conditions Good...And, What About Inflation? The economic data has been off this week, but not by any alarming rate. The NAHB Housing Index disappointed by 1 point, Weekly Jobless Claims rose only for the 4th time in the last 15 weeks, the Chicago Fed National Activity Index was lower, but still positive overall. Housing starts were better than expected and Existing Home Sales, while slightly below expectations, were higher than last month's numbers by more than 600,000 units. Later today, we'll get the preliminary number for July for the Markit Manufacturing & Services Indices. Expectations are that those two indices will be on-par or slightly below June's figures. What's of particular interest is that the Kansas City Fed Composite Index and Manufacturing Index were both higher month-over-month showing economic expansion. However, when we dive into the reports on the two indices, we see more troubling information regarding Inflation, Supply Chains, & Labor Shortages. In July, 91% of manufacturers said workers were in short supply, more than any time previously asked in survey history. Wage pressures also surpassed survey records with 78% of companies saying they have had to raise wages more than normal to attract or keep workers. With regard to supply chain issues, 56% of businesses reported increasing inventories, and another 36% reported turning away business. As a result of labor shortages and increased wages, 79% of businesses expecting to pay more for materials and 69% expecting to raise prices for their products. Meanwhile, the Chicago Fed's National Financial Conditions Index was relatively un - i.e., passing those costs onto the consumer. Meanwhile, the Chicago Fed's National Financial Conditions Index was relatively unchanged and the Wealth Protection Signal has returned to where it was before the sell off began on Friday of last week. The Signal would have to increase 225% to get to the first Cash Raise trigger. Earnings and positive corporate outlook are driving investor sentiment for the time being. Maybe investors are more akin to Fletch and looking forward to a happy ending at the end of the movie.