A Grind — Week of August 9, 2021

As of market close August 6, 2021. Returns in percent.

A Grind

Ah, those lazy days of summer. Remember when the crickets were chirping, volume dropped off and the Dow plodded sideways to lower? That scenario probably last happened in the 1970s. Last week was a good example of the modern Bull summer. Back-and-forth price movements day by day finished with record highs Thursday and Friday amid reasonable volume. The semiconductor group finally broke out higher after consolidating for several weeks. Semis can act as a leading indicator for tech, so lead the way please. Grinding sideways then higher builds internal energy for later rallies. 

Crude oil futures took a quick 5% drop after Chinese factory data suggested slower growth ahead and OPEC production numbers rose. Rising Delta case counts here and abroad may keep pressure on oil prices. Bond prices also moved lower thanks to the July jobs report. For the week, the 10-year Treasury rose in yield 13 basis points, or 0.13%. That does not sound like much, but it represents over a 1% move lower in price. 

Yes 88

Impressive earnings have finally pushed forward valuation measures lower, if only slightly. The price-to-earnings ratio for the S&P 500 has dipped from 22.8 pre-earnings season to 22.1 today. FactSet’s estimate is a full handle lower at 21.1. We cited this possibility in our 2021 outlook, but have wondered at times if it would happen, given the Bull rally. Delta and central bank concerns still sit front of mind, but the markets only have eyes for earnings. 

Great earnings results continue to pour in from the second quarter. More than three-quarters of the S&P 500 have reported, and 87% have beat earnings estimates. Tech, health care and financial services have led the parade, with over 92% of their group beating. At the end of June, analysts had estimated that earnings would grow by 63% over last year’s second quarter. As of Friday, the year-over-year earnings gain for the S&P is above 88%. According to FactSet this is the highest growth in earnings since 2009’s fourth quarter (109%). Current estimates for the third- and fourth-quarter earnings gains are 20% and 14% respectively. 

GM was the only big industrial name to guide estimates lower for the rest of 2021. Citing ongoing chip shortages out of Malaysian plants, the automaker plans to produce 325,000 fewer vehicles this year. Sales for all makes have been on a 16+ million pace this year, so that is at least a 2% cut in supply. We are on the downside of the earnings season. Only 12 S&P 500 members report this week, headlined by eBay, Tyson Foods and DISH Network. 

Need More

July’s job report showed solid gains. The headline number of 943,000 new jobs was misleading – it reflects a big seasonal adjustment for education jobs. The private sector payrolls gain of 703,000 was more reflective of actual job creation during the week of the 15th. Since February private sector payrolls have increased by 3.3 million. Payrolls are still 5.7 million below pre-pandemic levels, so we need more growth. We think at least 1 million people left the workforce, likely by retirement. Childcare and vaccination issues could account for a good portion of the remainder.

We are curious to see the effects of school reopenings on education hiring and workforce participation. Since last month’s survey, jobless claims have moved lower, suggesting that August’s report on September 3rd should show gains of at least 300,000. The separate unemployment estimate jumped down from 5.9% to 5.4%. That is a big move in this statistic, but not surprising given pandemic noise. Remember this number is a ratio, so do not be surprised if unemployment rises in the next few months if more folks start looking for work. An increase in labor supply would be a welcome change for many of our clients who “cannot find anybody to do anything” as one put it. Speaking of jobs, Monday’s Job Openings survey should stay above 9 million. 

Wrap-Up

It seems we cannot stop talking about inflation. July’s reading on Consumer and Producer prices will be released Wednesday and Thursday respectively. Both will be at least a 5% reading, held at these levels by gas and fuel prices. We expect that some of the component prices will have stopped rising. 

We do think the rise in interest rates has legs. Central banks need to stay coordinated in their actions to maintain relative stability in currency values. The Bank of England last week announced that it would raise their short-term interest rate at least once in the coming months before reducing their bond portfolio. Note that last sentence. The Fed is merely discussing whether to begin reducing their purchases of bonds. The Bank of England, and we think others, is actively responding to inflation by letting markets know they are not just reducing purchases but shrinking their portfolio. Taking away large buyers (demand source) means prices will have to adjust lower, pushing yields higher. 

Stocks and their companies can continue to rally in a higher rate environment. Our dashboard readings suggest slightly higher rates will not threaten the expansion. The end of summer can create some turbulence in markets. Any correction would not deter us from additional buying.
 

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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