by Jason Norris, CFA
Executive Vice President
Recent uncertainty due to the COVID Delta variant as well as concerns over the Federal Reserve tapering has resulted in a “risk off” market. Classic defensive sectors such as healthcare, consumer staples and utilities have outperformed the broad market this week. However, we believe that these concerns will abate, and investors should not be making changes to portfolios. We still believe we are in the early days of a robust economic cycle; therefore, we continue to position our equity exposure accordingly. We’ve been overweight cyclical areas of the economy, specifically industrials and consumer discretionary stocks, for close to a year and do not believe that should change.
We are bullish on both the economy and equities because of strong fundamentals. Corporate earnings have been robust, and we expect growth to continue. As we wrap up the most recent earnings season, S&P 500 companies reportedly exceeded earnings expectations by roughly 16%. With continued upward revisions in corporate earnings, equities look attractive.
With respect to the economy, the U.S. consumer is in a healthy position. The employment picture continues to improve, highlighted this week with unemployment claims at pandemic lows of 348,000. As more people get back to work, they also are sitting on healthier household balance sheets. Consumer debt has fallen 11%in the last 18 months (see chart below) and savings remains 30% above pre-pandemic levels. This week Bank of America highlighted a deceleration in consumer spending, specifically in travel, entertainment and restaurants. There has also been a reduction in Open Table app reservations and an increase in travel cancelations. Therefore, consumer spending will be below trend over the next few weeks. However, spending is still healthy with a two-year annualized growth rate of 11% and we believe the U.S. consumer expenditures will pick up as COVID Delta-variant cases peak in the next few weeks.
Source: Federal Reserve
How Many More Times
Headlines and anecdotes can result in individual investors getting out of the equity market, and historically, this has proven to be an incorrect move. We’ve shown the table below several times and find it compelling yet again. Except for a few months earlier this year, individual investors continue to sell U.S. stock mutual funds and ETFs, even as stocks grind higher.
Source: ICI, Eikon
Just in the last four months, investors sold over $173 billion in U.S. stock funds while the S&P 500 rallied over 10%. During this period, investors purchased over $230 billion in bond funds, even with interest rates at historic lows. It’s hard not to get caught up in the day-to-day headlines; however, what investors have to remember is how these events will affect long-term economic growth and corporate profitability.
Takeaways for the Week
Investors took risk off this week as stocks exhibited modest declines last week and bonds rallied as the yield on the 10-year U.S. Treasury fell to 1.24%
Political events can overly concern investors; however, they have to focus on the long-term economic impact of those events
With the Delta variant continuing to spread and the potential COVID spikes as schools reopen, expect stocks to be volatile the next several weeks