June jog — Week of June 7, 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||0.64||13.34||37.63||17.62||17.25||4,229.89|
|Dow Jones Industrial Average||0.69||14.55||34.98||14.44||16.97||34,756.39|
|Russell 2000 Small Cap||0.78||16.20||59.19||12.86||15.95||2,302.35|
|MSCI Europe, Australasia & Far East||0.74||11.58||33.75||8.78||10.55||2,357.80|
|MSCI Emerging Markets||1.60||7.71||43.15||9.32||14.14||1,381.56|
|Barclays U.S. Aggregate Bond Index||0.12||-2.17||-0.04||5.28||3.14||2,340.14|
|Merrill Lynch Intermediate Municipal||0.15||0.64||4.03||4.85||3.20||319.16|
As of market close June 4, 2021. Returns in percent.
A short week of graduations and end-of-school celebrations distracted stocks until Friday. The jobs report that morning focused a few traders on the Bull case and pushed most stocks higher. Big picture, stocks remain in consolidation mode. Consolidations come in two forms: 1) price or 2) time. Price consolidations generate lots of negative headlines on cable news because markets decline 5% to 7%. Time consolidations generate lots of negative headlines on cable news because markets go nowhere. When stocks sit in a tight range, going nowhere, the news media speculates when stocks will drop.
When it comes to consolidations, we prefer time over price. Trendless drifting back and forth in a narrow price range gives stocks a breather. Trend followers and momentum players tend to take risk off the table. Sentiment, fear and greed all have a chance to wind down. From a technical view, time consolidations let moving averages catch up to current prices, working off overbought or oversold conditions. We reached that point last week in most of the major indices. Although the Dow and S&P 500 remain nearly 5% above their 21-day moving averages, this is roughly half their 8% overbought gap from early May.
The 21-day moving average of closing stock prices is a handy indicator for price action over the last month. 50- and 200-day time periods figure into our discretionary portfolio decisions, as they shed light on intermediate market trends. Why not a price correction at the beginning of summer? After all, most Bull Year Two periods in history lean toward midyear weakness.
Bull / Bear
To answer the consolidation question, we look to the economy and market conditions. Stocks look ahead six months to a year, while economic data is in the rearview mirror. Market participants try to gauge how changes in the economy will affect companies’ future earnings. They cast their votes on these views by buying or selling shares. The U.S. economy, and to a great extent the global economy, is well into its recovery phase. Economists will look back on May or June of 2021 and mark a point where our GDP level recovered to and surpassed pre-pandemic levels.
The list of economic factors supporting future earnings right now is longer than we have space. Highlights include May ADP employment (+978,000 jobs), jobless claims best in 63 weeks (see below), productivity hitting decade highs (+5%), and the Markit Purchasing Managers' survey of services business hitting its all-time high.
The “wait and see” Bear case consists of inflation data and possibilities. May’s Consumer Price Inflation will be released this Thursday. Reuters’ polling of economists has the year-over-year CPI ranging from 4.2% to 4.9%. While we do expect CPI to have a 3% “handle” for the rest of this year, inflation should decline to mid-2% levels by the middle of next year. The possibilities of inflation staying above 3% combined with supply chains not improving, and with growth slowing more than forecast, would bring back the specter of ’70s stagflation. We agree stagflation is a nonzero possibility but have not moved it up to our probability list.
Unemployment claims continued their Recovery slide last week, falling below 400,000 for the first week since the pandemic started. The Bureau of Labor Statistics’ nonfarm payroll report for May missed expectations for the second month in a row. Recall April’s report was a disappointing 266,000 net gain versus expectations of 900,000. The 559,000 reported gain for May did not miss as badly as April: consensus was 671,000. Private payrolls increased by 492,000, mostly in leisure and hospitality (+292,000). The Fed would like to see job gains near a million per month – we would too. The private sector has to date recovered almost 70% of the 21 million jobs that were lost during shutdowns. At this pace the U.S. should regain 2019 job levels sometime in the middle of next year.
The chief obstacles to returning to work are the weekly $300 unemployment supplement from Congress and reopening rules. Virus cases and death numbers are falling to March 2019 levels for the first time. Twenty-three states are opting out of the supplement program over the next month. This should help job numbers somewhat, but the full impact will not be known until after the program ends in September. The Fed has enabled Congress' spending habits by keeping interest rates low and buying Treasury debt. Now it finds itself at odds with Congress, wanting jobs to increase while Congress is paying folks to stay home.
The S&P 500 has recovered the bulk of its 4% drop in early May. Drifting sideways over the last seven or so trading days puts us in a time correction. Daily price movements up and down, labelled volatility by the press, has fallen to levels suggesting complacency. History tells us when volatility falls to these levels and markets lose momentum there can be bumps in the short term. Our focus, however, is always on the intermediate and long term. Continued steady improvement in the economy and earnings keeps our indicators pointing up. Thus, we remain overweight stocks, specifically the U.S. and underweight interest rate sensitivity in our bond allocations.
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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