Around Again — Week of August 16, 2021

As of market close August 13, 2021. Returns in percent.

Around Again

Tiring of the Bull? We are impressed by the number of doubters and general grouchiness (word?) of investors around us. The calendar says we are halfway through August—generally a time when volatility can increase. One would surmise from the air of disappointment with the economy and markets that those folks would welcome a Bear or correction. Count us out of that wish. 

Yes, August could bring a correction, and post-earnings, one may still be in the cards, but timing is generally not a high probability way to navigate markets. This month stocks have moved from strength to strength, posting multiple new highs. Outstanding earnings, higher guidance and low interest rates provide a solid underpinning for this Bull cycle. We think we are in the second of three Bull cycles of the long-term (“secular”) Bull that began back in 2009.  

Just in time for delta slowdown worries, traders have rotated from energy and discretionary sectors back into value recovery areas such as industrials, materials and financials. How can that be with rising cases and, in our neck of the woods, nearly full ICUs? Stocks are always looking ahead, and markets are telling us that delta may be short-lived. Remember, markets played the value recovery tune back in the winter and spring. Rising prices and supply chain problems stalled the recovery theme and money rotated back to growth and tech sectors. Peaking prices and the possibility of higher interest rates send traders back around to value this month. We do believe the value tilt we initiated earlier in the year has room to run and are maintaining that position. 

Still Up

Consumer price increases held steady in July at a 13-year high. The Bureau of Labor Statistics’ Consumer Price Index has risen 5.4% above year-ago levels. On a month-to-month basis, prices rose 0.5%, almost half the 0.9% June increase. Core inflation, which strips out food and gasoline, rose 4.3%, down slightly from June’s 4.5% rise. Much of the Core moderation can be attributed to used car prices, which have mostly stopped increasing. Airfares and hotel prices also moderated. If the delta variant hangs around through October, we would expect continued price declines as travel is curtailed. 

Prices still react to supply and demand. Overall demand took a brief dive in the pandemic, and consumers shifted from dining out to binge home remodeling. Demand has largely recovered in most sectors. Industrial demand also recovered quickly and drew down inventories as production resumed. Once the stimulus money hit the economy the first inflation wave focused on commodities, then moved to consumer goods (used cars again). 

Next will be food. California and Oregon are responsible for a large portion of America’s fruit and vegetable production. The droughts and wildfires are certainly taking their toll. Argentina is the world’s number 3 corn supplier and Brazil is usually number 2 in soybean exports. Both countries are experiencing a “one in 100 years” drought according to Isaac Hankes, a weather analyst for Thomson Reuters. 

After food in the fall comes shelter. The shelter category, consisting of Owners’ Equivalent Rent (OER) and rent payments, make up nearly a third of the CPI. OER represents what a homeowner would pay if she were renting the home she owns. The BLS surveys roughly 30,000 rental units and prices every six months and then updates OER. So, most of the home price appreciation and recent rent increases are not factored into CPI yet. We expect they will contribute at least 0.75% to CPI near the end of the year. Food and shelter will keep CPI north of 3% in the months ahead. 

Wrap-Up

The delta variant has taken some of the wind out of the economy’s sails (sales). Trips are being canceled and consumer confidence predictably has dipped. Looking at other countries experience with delta suggests a peak near Labor Day, and some data series suggest earlier. 

Disney’s blowout results helped the Dow and S&P 500 to fresh records last Friday. This week marks the unofficial close to the second quarter “earnings season.” Retailers step up to the plate: Walmart, Home Depot, Lowes and Target are the headliners. We would expect some volatility as retailers may give fresh color on foot traffic with the onset of Delta and options expire at the end of the week. Stocks remain in Bull mode and have strong earnings to build on.

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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