August is often a reasonably calm month within the inventory market, nevertheless it was eventful this yr. We noticed main information from the Federal Reserve, traders began to digest the impacts of a brand new wave of COVID-19, and a few vital market traits reversed. Be sure to hold these tales in thoughts as we transfer into the again finish of 2021.
Weak spot in client sentiment
August marked a transparent reversal of earlier traits that had been vital within the first half of 2021. Shopper sentiment dropped sharply in August in an abrupt about-face after greater than a yr of restoration. Retail gross sales additionally mirrored this shift, as they dropped 1.1% from the prior month. Analysts cited weak car gross sales and considerations over the COVID delta variant as causes.
This can be a pink flag for a fragile economic system that relies upon so closely on shoppers, however the influence on the inventory market was modest. The S&P 500 really rose modestly on Aug. 13 following publication of client confidence knowledge. Analysts cited a constructive general outlook, and company earnings within the retail sector had been sturdy sufficient for individuals to look previous these outcomes. Maintain tabs on this one as you put together your inventory portfolio for development and volatility.
The Fed obtained extra particular
The Fed’s July assembly minutes shed some mild on tapering and charge hikes, hypothesis round which has been influencing markets all yr. Shares are more likely to stagnate or transfer barely downward when rates of interest rise, so volatility has adopted any alerts that the Fed would increase charges sooner than anticipated. Earlier this yr, financial development was trending forward of schedule, whereas rates of interest threatened to hit exceptionally excessive ranges. That is the precise state of affairs that might trigger the central financial institution to halt the bond buying that has saved charges low.
Notes from the most recent assembly affirm that the Fed will begin decreasing the bond-buying exercise someday this yr, nevertheless it will not make any transfer to really increase charges in the intervening time. The financial authorities acknowledge that inflation is a rising threat, however the committee members additionally consider that the economic system requires extra therapeutic earlier than it might probably stand by itself with out help.
The market reacted positively to the information, and development shares flipped a operating development that had seen them trailing worth shares, as proven within the chart under evaluating the Vanguard Development ETF (NYSEMKT:VUG) to the Vanguard Worth ETF (NYSEMKT:VTV). Traders’ threat urge for food was beforehand suppressed by fears about rate of interest hikes together with the return of COVID restrictions. The most recent announcement inspired capital to circulation to higher-risk investments.
The Fed acknowledged a particular time-frame for tapering whereas reaffirming its expectation for sustained low charges. That appears to have lowered nervousness round inflation, and it ought to have a stimulating impact on shares for a couple of months.
Company America is operating sturdy
Second-quarter earnings had been as soon as once more encouraging. Almost 90% of S&P 500 firms reported better-than-expected gross sales and earnings. They’re additionally exceeding estimates by file quantities. Outcomes had been particularly sturdy within the healthcare and tech sectors. Supplies and utility shares had been much less spectacular, although these sectors had been additionally extra constructive than unfavorable. Importantly, forward-looking commentary and steerage from company executives had been additionally constructive. Extra firms elevated their earnings forecasts for the remainder of the yr than lowered forecasts.
Dividends additionally seem to have recovered. Whole dividends paid in 2021 are forecast to come back in round 3% under the pre-pandemic peak, and 84% of firms have maintained or elevated their distributions over the previous 12 months. We’ll see if outcomes proceed to thrive towards more-difficult year-ago comparisons within the again half, because the tailwinds from stimulus and pent-up demand diminish. Within the meantime, wonderful company earnings are serving to to maintain shares shifting upward.
Not everyone seems to be sharing the wealth
The restoration has not been skilled equally by all parts of the economic system. The most recent employment report indicated that 3.4 million individuals have been jobless for 27 weeks or extra, representing 40% of the entire unemployed inhabitants. A few of this is because of prolonged unemployment advantages, and a few of it’s structural as individuals seek for new jobs after altering professions or shifting to a different metropolis. Nonetheless, this exhibits disparity in restoration charges.
Many small companies shut down completely final yr, and most of these displaced staff have mismatched abilities to the sectors which have thrived within the new economic system.
Our economic system relies upon closely on shoppers, and it is going to take time to totally get well. Some sectors will proceed to lag, and there is likely to be some velocity bumps over the subsequent few years as everybody resets. Do not be shocked if that causes some volatility available in the market.
This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one among our personal — helps us all suppose critically about investing and make choices that assist us change into smarter, happier, and richer.