There used to be a popular game show called Name That Tune. The best players could recognize a song in the least number of musical notes played. Actor Jamie Foxx has resurrected a similar idea recently with a show called Beat Shazam that he hosts with his daughter. (Shazam is a song identification application for mobile phones). Many times we try to “name the tune” that the stock market and economy are singing with only a few data points. Often it seems as if several songs are playing at different tempos simultaneously. A few notes don’t make up a song, but you may be able to anticipate the chorus after hearing a few bars.
This week and last we heard from a number of leading companies that drive the beat and the melody for the markets and reflect the underlying hum of the economy. Apple (AAPL), Alphabet (GOOG) and Microsoft (MSFT) sounded high notes in technology end-markets, Amazon soured a bit on e-commerce sales near term, Boeing bellowed an improving tone as airline travel recovers, while Honeywell is keeping the economic rhythm going (and the air conditioning on!). Stanley Black & Decker (SWK #) made it sound like do-it-yourselfers and pros are dancing in the aisles of Lowe’s buying power tools.
As Jim Meyer pointed out this week, the “beat and raise” cadence of quarterly earnings reports can continue for a long time, at least until investor expectations catch up. For example, Starbucks posted 78% revenue growth compared to pandemic shut-down conditions a year ago, reported earnings ahead of expectations and even raised guidance, but the stock sold off 3%. We would note that Starbucks was trading at a new high before the report, and many stocks have reacted similarly to good earnings news in this earnings season.
We continue to hear a strong economic drumbeat, but there are some dissonant notes to pay attention to. Supply chain disruptions, rising inflation and worker shortages could hold back growth in the second half of the year. Also, the highly contagious delta variant of the Covid-19 virus has raised cautionary flags again. The flip side of a resurgence of Covid cases and renewed restrictions is that the economy could cool a bit, leaving the Fed more reluctant to tighten or taper bond purchases. On the stimulus front, the Senate voted to begin work on a $550 billion infrastructure bill for “bridges to broadband” spending. A broader budget resolution could see over $4 trillion in total new spending pushed through. The full extent of tax hikes to pay for the proposed spending remains to be seen, although dynamic scoring is sure to be in the mix.
Another data point released yesterday was second quarter U.S. GDP, which came up short of expectations (+6.5% versus +8.5% expected). The overall level of U.S. GDP is now above pre-pandemic levels, which shows the rapid pace of this recovery. Personal consumption expenditures, the biggest part of the economy, advanced 11.8%, which was one of the largest increases since the 1950’s. These levels of growth are not sustainable, but indicative of the pent-up demand from Covid-related shutdowns.
The statement from the FOMC this week suggested basically no major near-term change to Fed policy: “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative.” Many read this to mean good progress toward the Fed’s inflation and full employment goals and a move toward tapering monthly bond purchases. The Personal Consumption Expenditures (PCE) price index, which the Fed considers as a measure of inflation, increased 6.4 percent in the June quarter compared with an increase of 3.8 percent in the March quarter. Excluding food and energy, the “core” PCE price index still increased 6.1 percent. Looking ahead, wages are rising in many industries, which can be sticky, and many companies discussed raising prices for their products and services in their conference calls. Transitory inflation? Probably. But we may need to hear a few more softer inflation notes in order to draw a conclusion.
We have been walking on sunshine for a while. The S&P 500 has gained 17% year to date, is trading near its record highs, and we have not had a 5% correction in the market since October. Are we building toward a crescendo, or simply completing a movement in a longer composition? We fall in the latter camp based on an accommodative Fed, continued consumer demand, job and wage growth, and further government spending, but time will tell considering the new concerns surrounding the Delta coronavirus variant and its future impact.
We may experience a hard day’s night in the second half of 2021 as we digest slower earnings growth, seasonal weakness and the possibility of a rise in Covid cases and new restrictions. Anticipation of Fed moves has kept investors on edge, but after yesterday’s FOMC statement, for now the song remains the same. Hopefully by next year we will be singing more verses of Born to Run and Here Comes the Sun rather than Help! or Taxman. Sticking to a diversified portfolio of high-quality growth and dividend paying companies seems the best refrain in this environment.
There are a number of notable birthdays today: Arnold Schwarzenegger (74), Bud Selig (87), Misty May-Treanor (44), Laurence Fishburne (60), Hope Solo (40), Patti Scialfa (68, wife of Bruce Springsteen and E-Street band member too). And let’s not forget Ringo Starr who turned 81 this month!
Christopher M. Crooks, CFA®, CFP® 610-260-2219