by Clare Market Investments on Aug 12, 2021
- The S&P 500 Index of largecap stocks returned +2.4% during July, while the Russell 2000 Index of small cap stocks returned -3.6%.
- Defensive sectors, such as Health Care, Real Estate, and Utilities, outperformed cyclical sectors, such as Energy, Financials, and Industrials, as the delta variant weighed on the economic outlook.
- Treasury yields fell as investors rotated into bonds. Investment grade bonds produced a 1.4% total return compared to high yield bonds’ 0.1% total return.
- Oil prices initially traded lower as the delta variant weighed on oil demand and OPEC prepared to raise oil production before finishing the month higher.
Delta Variant Pressures Economic Outlook
Investors began to question the economic outlook during July as the delta variant spread and Covid-19 case counts spiked. The rise in cases marked a dramatic shift from earlier in 2021 when rising vaccinations helped push case counts lower. The key question is when will delta variant cases peak. The outlook is uncertain, but there is encouraging news as U.K. cases trend lower from their recent peak.
The emerging delta variant and rising Covid-19 cases impacted stock market performance. While officials have not resorted to wide-scale lockdowns thus far, investors are concerned it will delay the economic recovery. The uncertain outlook increased market volatility during July, and riskier asset classes underperformed early in the month as investors trimmed bets on a rapid recovery. On a positive note, returns improved in the second half of July as fears
Second Quarter 2021 Earnings Season Kicks Off
According to FactSet’s Earnings Insight, 59% of S&P 500 companies have reported Q2 2021 earnings as of July 30th. Of the companies reporting results, 88% have reported earnings above Wall Street estimates (vs the 5-year average of 75%), with an aggregate positive earnings surprise of 17.2% (vs the 5-year average surprise of 7.8%). The blended year-over-year earnings growth rate (i.e., actual results for companies that reported plus estimates for companies that have not reported) for the S&P 500 is 85.1%, which would be the S&P 500’s highest earnings growth rate since Q4 2009. The data indicates corporate earnings are recovering nicely as the economy reopens.
A look across earnings call transcripts highlights multiple themes. Most importantly, management teams are generally positive on the economic recovery. Consumer demand is returning as restrictions are relaxed and the economy reopens. However, companies have highlighted multiple friction points, such as staffing shortages and shipping delays, created by the accelerated reopening. The issues are increasing costs, which is being passed through to consumers via higher prices. The friction points may slow the recovery near-term, but the long-term outlook remains positive.
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