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Backwards — Week of July 19, 2021

Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor

index wtd ytd 1 year 3 years 5 years index level
S&P 500 Index -0.96 16.11 36.18 17.76 17.08 4,327.16
Dow Jones Industrial Average -0.52 14.45 31.66 13.97 16.01 34,687.85
Russell 2000 Small Cap -5.11 10.06 47.87 10.22 13.86 2,163.24
NASDAQ Composite -1.87 12.34 37.79 23.93 24.75 14,427.24
MSCI Europe, Australasia & Far East -0.06 9.58 27.39 8.73 10.38 2,311.97
MSCI Emerging Markets 2.36 5.65 29.12 10.81 12.10 1,348.48
Barclays U.S. Aggregate Bond Index 0.31 -0.87 -0.27 5.50 3.17 2,371.17
Merrill Lynch Intermediate Municipal 0.08 1.29 3.44 4.84 3.13 321.21

As of market close July 16, 2021. Returns in percent.


History does rhyme, according to Mark Twain. Our screens tell us stocks snapped their three-week win streak, but not why. Rarely is there only one reason markets turn north or south. Solid, above-trend economic growth and excellent rebounds in corporate earnings should push stocks and interest rates higher. Instead, red is the only color on our screens the last couple of days. 

This morning’s tape shows travel, value and small company stocks down the most — exactly the opposite of last quarter. Recovery and expansion have temporarily given way to 2020 history, thanks to the Delta and new “Delta Plus” virus mutations. U.S. case counts jumped 70% last week, but in the low 40,000 range are still well below the prior three waves. The U.K. and Indonesia are seeing the greatest spikes. Shipping delays in China’s ports and Pearl River delta have risen back to August 2020 levels. 

Inflation of just about everything should be pushing interest rates higher. Instead, a new wave of global flight to safety pushed the 10-year Treasury to 1.19% from the 1.40% area. Some of the bond rally may be fueled by traders concerned that growth may be much slower down the road if the Delta variant sticks around. 

No, it’s not.

Speaking of inflation, Fed Chair Powell reiterated the idea last week that inflation will be temporary. We believe “transitory” means a couple of years, not quarters. Minutes of the most recent Federal Reserve Open Market Committee meeting show that members are having doubts about how long “transitory” is. True, much of the recent spike in the Consumer Price Index was due to used car, travel and gasoline prices. All three are either peaking or have dropped from recent highs. OPEC’s announcement over the weekend to return to full output took at least $5 out of the price of crude this morning. Just because “peak is past” does not mean inflation is going away anytime soon.

Yes, it is.

Consumer Prices rose 0.9% in June, a 9.8% annual rate. This brings the headline CPI to a year-over-year rise of 5.4%. Excluding food and gasoline, the core CPI is 4.5% above July 2020. Used cars, 10.5% in June and 45.2% over 2020, accounted for more than one-third of the jump. Re-read that last sentence. When would one ever consider a used car rising in price, let alone rising by nearly half in one year? Clearly, we buy the wrong cars. One would hope the commodity maxim also applies to cars: “The cure for high prices is high prices.” The Mannheim weekly used car index has fallen the last two weeks, so possibly used car prices have peaked. Retail sales were slightly higher in June due to prices paid for cars. 

Yes, inflation is here. Peaked or not, prices will remain elevated. We expect inflation to drift lower in the fall but end the year still in the 3% area. Pent-up shutdown demand and crimped supply chains are bad enough. The addition of nearly nonstop spending from D.C. —such as the new $300 per month child credit — and near-zero interest rates will prolong rising prices longer than the Fed expects. Still coming are higher prices for food and “owner equivalent rent.” OER is the fictional amount that a homeowner would pay if they rented their home. That price series is rising at 2.3% per year. By some estimates, CPI would be back to 1980 levels if the rise in home prices were included. No thanks. 

Out there

What else could affect markets? Weather and political change can disrupt markets but are usually temporary. Most involve a “flight to quality” where investors buy U.S. Treasury bills and notes as a safe haven. Rates have had a downward bias since peaking at the end of March. In past missives, we have discussed the lack of bond supply, the Delta variant and short covering. Last week, we added the safety trade. Unrest in Cuba and anarchy in Haiti and South Africa top the list. Fortunately, Hurricane Felicia is the only one on the map today, and it is weakening as it heads west into the Pacific. 

Strong, but not strong enough

Earnings should be the story of the month. Analyst forecasts of a 65% increase in year-over-year earnings look very possible. Of the 45 S&P 500 members that have reported second quarter earnings, 86% have beat by an average of 18% and a whopping 119% of estimates. For that small sample, that is double the analysts’ estimates. Market reaction: “Meh, what’s next?” In other words, the fine rally we had in the second quarter was based on expectations that earnings increases would be (and are) stellar. 

Among the 77 S&P 500 members reporting this week are IBM, Netflix, J.B. Hunt, Johnson and Johnson and Texas Instruments. TI should be an interesting report because they are a large supplier of chips to the automotive industry. Union Pacific reports on Thursday. Last week, they startled the shipping world by announcing a one-week closure of train activity on their lines into Chicago. Apparently, the shortage of container chassis and truck drivers are causing congestion in Chicago that, in turn, is creating problems at the Port of Los Angeles.  

June’s building permits and housing starts released this week should give us clues as to whether the construction boom is peaking. Lumber futures have fallen 42 out of 47 trading days since early May, erasing their 2021 gains. August delivery prices are still 40% above their 2019 lows, however. We are still hearing stories about crews and subs walking off jobs or not showing up because they received better offers. Some pockets of existing home sales appear to be slowing also. 


Most of the major stock averages are within 4% of their recent highs. Breadth has narrowed to just large cap growth. Investor sentiment is a bit wobbly thanks to new regulatory efforts from China and Washington, along with virus cases. The Delta variant will continue to push case counts higher, but the surge in cases appears to not last as long as earlier waves. Summer usually brings corrections, and this one may include buying opportunities.

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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