Week Ended July 23, 2021: "Buy the Dip"
Last week was another week that reinforced the investor mantra that has largely driven #equity markets since the beginning of the pandemic: “buy the dip.” After a dismal start on Monday with the “fear-index” (#VIX) rising to levels not seen since mid-May, equity markets stabilised and then continued their march upwards the rest of the week in the US and Europe. Concerns about future economic growth and the lingering effects of new COVID variants were swept aside, as earnings retook centre stage. In the US, 81 of the S&P 500 companies reported #earnings last week, with most beating analysts’ expectations. This provided a floor for equities, serving as a base for stocks to push higher. The US and European equity markets rallied four days running after Monday, with both the S&P 500 (+17.5% YtD) and the Eur STOXX 600 (+15.7% YtD) closing at record highs on Friday. Japan was the exception last week as far as developed markets. In a holiday-shortened week, with the Summer Olympics starting on Friday in Tokyo, the Japanese equity market remained under intense pressure, down 1.6% W-o-W (market closed Thurs and Fri).
US equities found their footing after macro concerns weighed heavy on Monday with the four major stock indices I track registering solid gains for the week. As I already mentioned, focus largely continues to be on earnings, with featured names reporting this past week including KO, T, INTC, JNJ, KMB, #NFLX, TWTR and SNAP, amongst many others. More than the usual number of companies beat analysts’ expected sales and bottom-line results. #TWTR and #SNAP delivered particularly strong beats on Thursday, providing a late-week boost to share prices since both companies experienced very robust customer advertising spend, which is positively correlated with economic growth. You can find the weekly earnings summary from #Refinitiv here, which is excellent. This coming week will also be closely watched, as another 177 S&P 500 companies report earnings – see section at bottom of this article for more information. The simple fact is that above-expectations sales and earnings growth for this quarter (so far) are pushing mixed macroeconomic data and pandemic news to the background, with valuation measures largely being ignored, too. This is a market in which it makes perfect sense to remain long so long as you can sleep at night with historically high valuations, with a few other caveats too (subject of an upcoming article, so stay tuned).
As far as the #credit #bond markets, yields remain largely stable although there was some spread movement (modest) throughout the week as underlying US #Treasury yields gyrated. YtD, new issuance in USD has been nearly $1.4 trillion, below the record post-pandemic pace of 2000 but well above new issue volumes of 2018 and 2019. This new issuance has been split about 72% investment grade and 28% high yield. In EUR, the story has been slightly different, with new issue volumes running at €542 billion YtD, less than half of new issue volumes in USD. The pace of new issuance in EUR is also behind that of the last three years. (All data sourced from #Moodys, here.)
In the US Treasury bond market, government bonds ended the week largely unchanged. Yields steadily climbed after Monday’s scare, during which there was strong flow into USTs as a safe haven during the one-day equity market meltdown.
Yields on Eurozone and UK government bonds were several basis points lower on the week. Since the end of 1Q21, inflation concerns have abated and growth concerns have moved more into the forefront, both driving government bond yields lower. Also, it is clear that the Fed, ECB and BoE will stick to their accommodative policies for now, which they consistently and regularly reiterate.
Gold, the USD and Yen – all traditional safe haven assets – traded in a narrow range most of the week.
The USD found further strength, probably reflecting flows early in the week into USTs (safe haven), and then a migration back into US equities as earnings underpinned a strong performance in US stocks from Tuesday onwards. Oil found its bottom and even managed to eke out a small gain during the week, after OPEC+ finally agreed to new production targets that gradually increase supply in the coming weeks to meet growing demand. #Bitcoin and its bretheren remain under pressure, but #BTC did bounce off of lows below $30,000 early in the week to end up 4.9% W-o-W. After doubling in price in the 1Q21 and giving it nearly all back in 2Q21, BTC has still managed to deliver a 15.8% return YtD, far better than #gold (-5.0% YtD) if an investor considers BTC an inflation hedge, but slightly below the return YtD of the S&P 500 (+17.5% YtD) if BTC is considered more of a risk asset.
This week – it’s all about earnings
Much of the focus this coming week will continue to be on earnings, although professional investors are still closely watching the #Treasury bond market (for inflation indicators or slowing economic growth) and the evolution of the pandemic. With new variants, relaxed standards in many countries and a good number of anti-vaxxers, many countries have reached plateaus as far as the vaccinated population. This confluence of factors is causing cases of #COVID-19 to increase once more. That aside, since it seems to have limited influence on investor sentiment, the focus will be on earnings. 177 of the S&P 500 companies will report 2Q21 (mostly) earnings this week, including many bell-weather names. All of the #FAMAG companies release earnings, as do several of the DJIA component companies and “new tech” names. Earnings releases kick off on Monday with TSLA (after close), and progress throughout the week as follows (selective names only – see Interactive Investor website here for a more comprehensive list):
Tues: GE, GOOG, AAPL, MSFT, SBUX, V
Wed: BA, MCD, SHOP FB, F, PYPL, QCOM
Thurs: MA, MRK, AMZN
Fri: CAT, XOM, PG, BRK.A
Earnings releases will continue the following week, and July economic data will also start to trickle in which will provide more insights into the direction of the global economic recovery.
As far as positioning in this environment, I will write a short article providing my thoughts on this early next week. Also, if you missed my article on stock splits (featuring #NVDA) last week, please check it out here.
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