DIASTOLE ECONOMIC AND MARKET COMMENT
July 19, 2021
Last week stocks fell and bonds rose (causing yields to decline), which is not what’s supposed to happen during inflation. Then again, markets are unpredictable, and there are many cross-currents affecting them. Investors were and are concerned with new data showing that coronavirus cases are rising in all 50 states due to the Delta variant, and that Covid is still killing more Americans than guns, cars, and flu combined.
With Covid resurgent, we are seeing pandemic price moves again: airline, cruise line, and hospitality stocks are sliding, while pharmaceutical and construction companies are rising. But that’s just this morning. If the Delta variant persists or worsens, we are likely to see mask mandates return and maybe even some new lockdowns. In that case, big tech comes back to the fore, and consumer spending, which was robust in June, begins to lessen.
For now, prices are rising for many things, especially new and used cars, which accounted for half of the core Consumer Price Index (CPI) rise between May and June (0.88%). But oil prices are falling. There are two main reasons. First is the obvious idea that people will travel less as the Delta variant surges, and second, OPEC+ just reached an agreement to produce more oil. Production cuts last year reduced available oil by 5.8 million barrels each day. As demand has increased, prices rose. Now OPEC+ has reached an agreement to increase production by 400,000 barrels per day per month until production is back to normal. It remains to be seen whether OPEC+ (23 nations led by Saudi Arabia and, to a lesser extent, Russia ) will get caught wrong-footed if people cut back on travel again.
So, is inflation coming or going? According to Federal Reserve Chairman Jerome Powell, who testified to Congress last week, prices are currently high due to dislocations in supply chains and the difficulties of re-starting the post-pandemic economy. He expects inflation to moderate, and doesn’t think it’s time to tighten up monetary policy. Largely this decision rests on the state of employment in the country. Current unemployment is at 5.9%, but pre-pandemic unemployment was 3.5% - also considered “full employment”.
The Fed continues to buy Treasuries and thus keep yields low. In fact, during a recent period, the Fed bought more Treasuries than the federal government issued. Even when inflation is feared, some investors and countries still must buy Treasuries, so limited supply of Treasury bonds is a factor in falling yields.
There are a couple of worrying signs in stock markets. Americans’ allocations to stocks has reached just under 60% of investible assets. This is barely shy of the all-time high of 61.7%, which was reached during the dot-com bubble of the late ‘90s and early 2000s. It is usually a bad sign for stocks when ordinary investors believe it’s time to jump in. And market breadth has deteriorated to the point at which now only 49% of S&P companies are trading above their 50-day moving average. A few months ago, it was 90%.
As I said earlier, cross-currents. Covid, better or worse. Inflation, higher or lower.
There was bad news on other fronts last week. We learned that the Amazon rainforest, which has long been touted as the carbon absorber for the world, now produces more carbon itself than it can absorb. This is mainly due to land-clearing and fires. And opioid deaths rose in 2020 by 30%, hitting 93,000 - the highest level ever recorded.
But there was good news, too. Amazon got FCC approval to make a device that remotely monitors your sleep. Using radar. Wait, that’s not good news.
And the Guinness World Record was set for most expensive french fries by Serendipity3 in New York City. The potatoes are blanched in Dom Perignon before being cooked in goose fat, seasoned with truffle salt, tossed in truffle oil and covered in shaved truffles, cheese, and 23k edible gold. If you’re still on the fence, the fries are served with a side of Mornay sauce. Is that good news?
For the week ending July 16th, the Standard & Poor’s 500 finished at 4,327, the Dow Jones Industrials at 34,687, and the Nasdaq Composite Index at 14,427. The yield on the ten-year Treasury Note closed at 1.31% but is lower today. N.Y. gold cost $1,814.50 per ounce, U.S. crude oil cost $71.81 per barrel (also lower today), and one Euro was worth $1.1806.
Elizabeth E. Cook
News and information presented here was gathered from sources believed to be reliable, including, but not limited to, Yahoo Finance, The Wall Street Journal, Barron’s, The New York Times, The Washington Post, USA Today, Business Insider, The Economist, CNN, CNBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook
The storming of the Bastille has remained a symbol of the French revolution for more than 230 years, even though it turned out that there were only seven prisoners kept inside - four forgers, a sexual deviant, and two madmen. The prison itself was torn down starting the next day, July 15th, 1789. But it turns out that you can still see the key to the Bastille at George Washington’s home Mount Vernon. The key was gifted to him by the French in thanks for America’s help with their revolution. Which we owed them because of all the help they gave us in our revolution. It’s nice to have friends.