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Rolling Fives — Week of July 26, 2021

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

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index 1.97 18.40 36.76 18.40 17.39 4,411.79
Dow Jones Industrial Average 1.12 15.72 32.43 14.40 16.18 35,061.55
Russell 2000 Small Cap 2.15 12.43 49.84 10.57 14.20 2,209.65
NASDAQ Composite 2.84 15.54 39.65 24.90 25.10 14,836.99
MSCI Europe, Australasia & Far East -0.19 8.94 25.99 8.36 10.25 2,298.19
MSCI Emerging Markets -0.96 3.99 25.69 10.22 11.65 1,326.38
Barclays U.S. Aggregate Bond Index 0.30 -0.64 -0.49 5.75 3.19 2,376.76
Merrill Lynch Intermediate Municipal 0.11 1.40 3.09 4.87 3.15 321.55

As of market close July 23, 2021. Returns in percent.

Rolling Fives

Markets never move in a straight line and this rally is a good example. Last Monday’s nearly 2% drop for several of the major indices sent brief shivers down investor spines. It was the fifth worst one-day slide this year although it felt like the worst to some. The blah beginning of the week finished off a five-day, 2.9% drop from the last record high for the S&P 500 set on the 12th. Big drivers for the drop were rising Delta uncertainty, inflation uncertainty and OPEC uncertainty. We are certain the uncertainty trade was in force. Earnings finally pushed their way on stage to power four days of gains and new records for the Dow Industrials and S&P 500. The Dow also closed above the psychological barrier of 35,000 for the first time. 

The key for long-term investors is to remember that corrections and consolidations are part of the playing field. The fifth worst performing day of the year marked the fifth time since November that the S&P 500 dropped down to its 50-day moving average. The 50-day level has provided meaningful support for most stock sectors since the recovery rally began last April. In many respects the 97% Bull run from the April 2020 low is a “typical” Bull, just greatly compressed in time. In a more “typical” Bull, the five-day drop would be three to four weeks of sideways grinding; the 15-day rallies would take three months. 


April 1st marked the start of the second quarter, and on that date, Wall Street analyst consensus estimated second quarter earnings would jump 54% over 2020’s second quarter. Now that 120 S&P 500 companies have reported, analysts are busy upping their estimates. A 54% jump is now 78%, according to Reuters. No foolin’. Most of those 120 companies are beating their earnings per share estimates by 17%, and finally their stocks are reacting. Most wins are seeing at least a 1% increase in their share price over the next day of trading. Two high-profile examples: Moderna jumped 7.8% after the European Union approved its COVD-19 vaccine for 12- to 17-year-olds. On the other end of the spectrum, Intel said that it still has supply issues that lowered its forward earnings guidance. Its stock fell 5.3% on the news.

All eleven S&P 500 sectors are reporting year-over-year growth in revenues and earnings. Energy, of course, is bouncing back the most, thanks to the end of shutdowns. One energy frustration of reopening: hazardous truck drivers are in short supply, cutting fuel deliveries to gas stations and airports. 

This week there are 180 S&P 500 members (10 of whom are Dow Industrial members) reporting, including heavyweights Tesla, Lockheed Martin and UPS. This is “mega-tech” week — Apple, Amazon, Facebook, Microsoft and Alphabet (Google) report. Apple is expected to report a 26% rise in quarterly revenue thanks to strong 5G phone sales. Wednesday is Boeing day, Thursday is Amazon, and Friday stalwarts Exxon, Caterpillar and Chevron finish the week.

Real Sources 

Over the last few weeks, we have detailed how supply chain problems and pent-up demand have contributed to rising prices. Milton Friedman famously quipped that “inflation is always and everywhere a monetary phenomenon.” He was referring to the fact that the price levels rise when there is a more rapid increase in the quantity of money than in economic output. The government’s pandemic response provides an excellent case in point. 

According to the Committee for a Responsible Budget, $13.2 trillion has been authorized or set aside for COVID-19 relief in the United States. Of that amount, only $5.3 trillion moved into the economy, either by grant or government spending. And of the $5.3 trillion, close to $1 trillion has been saved or used to pay down debt by consumers. So cut economic activity by $2 trillion — more on that in a moment — and add $4 trillion in cash. There is the source of the 5.4% increase in the Consumer Price Index. A 20% increase in the supply of money will cause prices of goods in demand to rise. An economist would state that “a roughly 20% increase in the monetary base will move to whatever goods are in demand.” Since workers are not thrilled about mass transit, those returning to work have demanded used cars. Stuck at home and bingeing on home improvement shows grows demand for lumber, refrigerators, and flooring.

Delta = Change

Some of the recent nervousness in stock and bond markets concerns the Delta variant of COVID-19. All viruses mutate to strengthen themselves; some researchers believe that is their primary job. Variants were bound to arise, just as with other viruses. Delta distinguishes itself because its protein spike DNA sequences apparently bind much better to ACE2 receptors in the lungs. Researchers have determined that the variant grows faster and to much higher levels, up to 1,000 times more, than the original strain. 

The scientific Greek sign for change just happens to be the letter delta. The rapid spread of the Delta variant has changed perceptions of the global recovery and cast doubt on reopenings. In the U.S. the new variant is responsible for more than 80% of new cases and case counts are higher in all 50 states. The CDC director stated that 99.5% of COVID-19 deaths over the last few months were from unvaccinated patients. The U.K. did end restrictions last week, but officials are watching closely. One very small positive from how rapidly the Delta variant spreads is that the speed with which it moves through a population may mean the wave would not last as long as prior ones. 


In addition to more good earnings news, the Federal Reserve will be back on stage with another two-day policy meeting and press conference. There is some street chatter that the Fed will release plans on lowering the dollar amount of securities it buys each month. We think the Jackson Hole symposium is a more likely venue but will be watching. The first estimate of second quarter GDP will be released on Thursday — consensus is an 8.6% rise in output.

It’s official: The Business Cycle Dating Committee of the National Bureau of Economic Research announced last week that the recession ended in April 2020. The two-month recession is the shortest on record. The 10% drop in economic output is also the largest. Quick action by the Federal Reserve last year and government spending referenced above have aided the recovery. The economy is now in expansion mode and will continue to improve the rest of the year. Solid earnings growth and strength to weather the Delta storm should power stocks to levels above today by the end of the year.

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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