Telemus Weekly Market Review August 16th - August 20th, 2021
The Changing Seasons
As we head into the back half of August, whether we like it or not, we must face the fact that we are nearing a transition away from summer and into the fall. Similarly, we seem to be at transition point in the economy where stimulus is running off and the post-vaccine surge in demand is moderating. The market is now beginning to grapple with the challenge of forecasting the cadence of economic activity as we move into the next phase of the economic cycle. This has led to pockets of higher volatility in both the stock and bond markets. This past week the S&P 500 fell -0.6% but had been down more before a late week rebound pared losses. The S&P 500 is up +19.4% year-to-date and has set 49 different record highs thus far in 2021. It is only reasonable to expect pockets of volatility and some modest pullbacks as economic cycle continues to advance.
More recently economic indicators have exhibited signs that the pace of improvement may be slowing. This doesn’t mean the economy is in decline, but rather the rate of growth is decelerating. This was most prevalent this past week when we saw a -1.1% decline in retail spending. This measure compares the level of retail spending from June to July. While the rate of spending declined month-over-month, $617.7 billion worth U.S. retail sales in July of 2021 was still 18.9% higher than $519.4 billion worth of sales registered in July of 2019, prior to the pandemic.
In our view, its only reasonable to expect some level of moderation from current levels. In aggregate many economic indicators remain well ahead of where they were pre-COVID. A negative comparison may sound bad on the surface, but one must dig deeper into the data to properly understand it. There is a common investment expression that the market is a discounting mechanism. This phrase refers to the fact that asset prices seek to discount future expectations. As we move forward, the market is going to adjust expectations around several factors that frankly are challenging to forecast. In addition to economic indicators, such as retail spending, the timing and pace of the Federal Reserve’s asset purchases (QE), and the normalization in consumer behavior (particularly in light of the rise in COVID-19 cases stemming from the delta variant) are a couple examples of added considerations that need to be discounted to varying degrees in asset prices.
We have recently seen some evidence in how a shift in expectations might play out. This past quarter companies such as Facebook and Amazon reported very strong financial results only to see their share prices fall as their guidance around future earnings depicted a slowdown in the rate of growth. The share price of Amazon is now below where it started 2021, having fallen -2% year-to-date. The forward-looking discounting mechanism of the market is beginning to factor in the next stage of the economy and how it might impact the profitability of a company such as Amazon.
We believe the market, in aggregate, has begun to shift its sights away from what has worked over the past year-and-a-half and is looking at what might be different going forward. Not everyone holds the same expectations, nor do they see things occurring in the same cadence. This could lead to more volatility in share prices and potentially some minor pullbacks in stock prices. Ultimately, economic indicators and corporate earnings remain robust. Given this, we don’t see modest pullbacks as something to be alarmed about. Rather episodes of higher volatility, and potentially a pullback in prices, are a byproduct of a normal functioning market that is adjusting its forward-looking expectations.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.
