Stocks consolidated recent gains last week, catalyzed by several concerns.
The most visible market concerns are the surging virus that’s causing weaker-than-expected economic readings, while anticipation continues to build over potential reductions in Federal Reserve bond purchases later this year. We are also in a seasonally weak period for stocks, while tax reform and the looming debt-ceiling showdown in Congress remain sources of potential volatility.
However, we remain encouraged by the recovery that has been unfolding since the economy began reopening. We continue to see improvement in important cyclical sectors of the economy while consumers are historically healthy and still have pent-up demand. Business confidence has rebounded with strong corporate profits that should support further capital spending and hiring (there are now more job openings than there are unemployed people by a record amount).
We expect to see further improvement in the international backdrop, supported by unprecedented fiscal and monetary stimulus and accelerating rates of vaccination. Although the impact of the Delta wave is still being felt, recent evidence confirms the effectiveness of vaccines in limiting deaths and hospitalizations. With the pace of vaccination now picking up in the areas most impacted by this wave—Asia and Australia—the case for fading headwinds leading to improving economic growth later this year remains positive.
The signals from financial markets themselves remain positive. Despite consolidating last week, stocks remain near record highs while the 10-year Treasury remains well above the lows of earlier this summer when concerns about Delta first emerged.
These factors support our view of a durable economic recovery from the pandemic that should continue supporting stock prices. A healthy labor market is a critical element for a sustainable recovery that supports profit growth and last week’s news from the labor market remains encouraging.
JOLTS Report and Jobless Claims Support Healing Labor Market Narrative: The Job Openings and Labor Turnover Survey (JOLTS) showed job openings jumped another 7.4% in July, the same as in the previous month, to 10.9 million, a new record high. The increase was led by health care and social assistance, finance and insurance, and accommodation and food services. There are now far more job openings than people employed – 10.9 million openings vs. 8.7 million unemployed in July (a record gap). Voluntary quits, which increased 2.8% to nearly 4.0 million, the second highest level on record, is also indicating strong worker confidence.
Historically, job openings is a leading indicator for hiring and this report is signaling a very tight labor market, with falling unemployment, and rising wages, in the months ahead. Importantly, this attests to the underlying strength of the economy and bodes well for the sustainability of the economic recovery.
Weekly jobless claims are also an important barometer of the labor market and initial claims for unemployment insurance dropped 35,000 last week to 310,000, another pandemic low, and below the consensus of 335,000. It was the sixth decline in the past seven weeks, a sign of fewer layoffs, even as the Delta variant dented the pace of hiring. This is an important confirmation of a healing labor market.
Persistent supply chain constraints linked to the limited availability of key inputs (semiconductors and labor) and transportation impediments (clogged ports) remain a risk to economic growth and a source of inflationary pressures. Indeed, these issues have been a major reason for downward revisions to third-quarter economic growth. However, this is also causing record-low inventory levels and pent-up demand that are a source of growth in future quarters. We expect these constraints to alleviate in the coming months as Delta fades with accelerating global vaccinations. Further labor market improvement should also help supply chain issues.
We continue to prefer portfolios with diverse exposure. This includes exposure to sectors that benefit from improving economic growth and rising interest rates, including Financials and cyclicals (Energy, Materials, and Industrials). Exposure to secular growth themes are also important, including Technology and Health Care. SIPC
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