Latest News and Market Commentary
Latest News
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Market Commentary
Quoted from Schwab Market Perspective: The Next Phase. A summary of the key points of the article appears below.
Although we’re not out of the pandemic yet, the economy is showing encouraging signs. Job growth has been strong and financial markets appear to confirm that the economic cycle has shifted from recovery to expansion. Global earnings estimates are being revised upward and global business leaders are expressing fewer concerns about supply constraints than earlier this year. Given these signs, the Federal Reserve may start tapering its support for the economy sooner than expected.
Which isn’t to say there aren’t market risks out there, including the spread of the COVID-19 delta variant, overly bullish investor sentiment (a contrarian indicator when taken to extremes), and the return of the federal government’s debt ceiling.
There is a lot of information here and in the linked article. To reduce scrolling the major topics have been collapsed into the subtitled sections below. Click or tap on the section title to expand the section. Once opened, there is a link at the bottom of the text to collapse the section back to the title block. If you would like to print this page, be sure to expand the sections that you want to be included in the printout.
U.S. stocks and economy: Beyond the recovery phase
One of our concerns throughout the COVID-19 pandemic has been the potential for last year’s business shutdowns to inflict longer-term scarring on the labor market. However, recent labor data has been positive: The U.S. economy added 943,000 jobs in July, above the consensus estimate for 870,000, while the unemployment rate declined to 5.4% from 5.9%. Permanent job losses appear to have peaked, along with the percentage of people without a job for more than 27 weeks. The reduction in long-term unemployment, drop in the unemployment rate, and record number of job openings all suggest an economy in expansionary mode.
- Permanent job losses appear to have peaked
- Companies with weak balance sheets have under-performed recently
- Long-term sector trends remain relatively healthy
Global stocks and economy: Earnings rebound
Some international stock markets have been more focused on regulatory policy recently. However, every quarter we review the impact that developments around the world have had on the most important driver of stock prices over the long term: earnings.
Now past the halfway point in second-quarter earnings season, we can analyze the potential impact of the lingering pandemic-related supply shortages on profits going forward, relative growth expectations for the next year, and the impact on stock market valuations.
Our tracking of mentions by business leaders of shortages negatively affecting global companies (represented by the MSCI World Index) peaked three months ago on May 7, as you can see in the chart below. This led the improvement in supplier delivery times in the purchasing manager indexes subsequently reported for June and July. Improvement in supply-chain conditions could bolster confidence in future revenue estimates and support profit margins. Additionally, easing prices could mean less fear about inflation and the end of monetary stimulus, which may also aid earnings estimates.
- Business leaders’ mentions of supply shortages peaked in May
- Earnings-per-share growth is expected to exceed pandemic levels
- International stocks trade at largest-ever discount to U.S. stocks
Fixed income: Yields climbing
The July U.S. employment report jolted the bond market out of its doldrums. The 10-year Treasury yield, which had fallen sharply to as low as 1.13% just a few weeks ago, spiked higher on signs that the job market has continued to gain momentum.
- Revisiting the 10-year Treasury yield
- Prime-age workers continue to return to the workforce
- Tapering projections: Sooner and later
- 10-year Treasury yields historically have fallen after tapering was announced
Washington: The debt ceiling returns
After a two-year break, debt ceiling worries are back—and are likely to increase market volatility as we head into the fall.
In 2019, Congress voted to suspend the debt ceiling—a cap on the total amount of debt the United States can accumulate—for two years, until July 30, 2021. The U.S. Treasury has already begun employing “extraordinary measures” to ensure the United States does not default on its debts, but those measures are likely to run out sometime in October. Congress will have to raise or suspend the debt limit by then, and there’s no clear path to do so.
The most significant crisis happened in 2011, when Congress waited until the very last moment to avoid default. The Cboe Volatility Index spiked and yields on 10-year Treasury notes fell. The crisis peaked when Standard & Poor’s downgraded the credit rating of the United States for the first time ever, leading to what at the time was one of the most volatile weeks in the market’s history. Market unrest was a huge factor in finally pushing Congress to act just days before the country went into default. This scenario repeated itself, with varying degrees of volatility, during debt ceiling debates in 2013, 2017, 2018, and 2019.
The bottom line is that while the path to addressing the debt ceiling is unclear at this time, Congress has always managed to find a way, and the expectation is that they will do so again in 2021. But investors should be prepared.
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