Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 22

Happy Monday. Hope you stayed cool this weekend. It was a hot one around the country.

Markets Update 

The overall stock market posted a small gain last week and continues to hang around all-time highs.  

The energy sector posted the best returns last week, up nearly 7%. The energy sector is now up nearly 50% on the year. Sectors that lagged last week were Consumer Discretionary and Health Care. 

Last week, we did get the May jobs report that suggested the economy still has a long way to go from the Fed’s goals and even pre-pandemic employment levels. Nonetheless, remember that employment is a lagging economic indicator. It will improve. The economy is doing well. According to independent research firm Strategas, “the Atlanta Fed’s tracking estimate for U.S. 2Q real GDP is at 10.3% quarter over quarter annualized, i.e., very strong. Imagine what it could be if we did not have labor disincentives, homebuilders backed up, chip shortages affecting autos, remaining hesitancy with vaccine rollouts, schools partially closed, and skill mismatches.”  

For the year, the market is now up nearly 13%. The one-year return is still up over 40%. U.S. small caps are up over 16% YTD and over 54% over the last year. The average stock is up over 23% YTD and over 62% the last 12 months. 

Deeper Dive 

It was another exciting yet volatile week for the meme stocks such as GameStop (GME), AMC (AMC) and Blackberry (BB). Setting aside the question of whether or not these stocks are worth investing in short or long term, from where I sit, they have helped bring new investors into the market. This is also revealed in flows data. More than half a trillion dollars has poured into stock ETFs and mutual funds this year, according to EPFR global, amounting to 3.5% of all the money that had accrued in these portfolios from the dawn of time through Dec. 31, 2020. This is a great time to be a financial advisor.

There were two stories over the weekend that could have set the stage for some early weakness this week, but so far it appears the markets have shrugged off the new stories. First, Treasury Secretary and former Federal Reserve Chair Yellen said that higher interest rates would be good for the country. “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen told Bloomberg. 

Second, over the weekend the G-7 nations agreed to support a global minimum corporate tax of at least 15% on the largest companies in the world with profit margins of at least 10%. Yellen, again, hailed the move as “significant and unprecedented.”  

Nonetheless, we open the week essentially unchanged and near all-time highs. And the outlook still looks bright.   There is both clear and positive momentum for the economy and markets. The trend is your friend. 

The potential little flies in the ointment, however, that could suggest cooler shorter-term returns, though not necessarily negative ones, are seasonal patterns (June has been on average the worst month in the market over the last 20 years) and investor sentiment. On the latter, for example, the number of bearish investors (at least according to the AAII investor survey) reached a multi-year low last week.  

The 10-year Treasury yield moved slightly lower last week to end at 1.56%. If CPI is better than expected this coming week, this could be the week that we finally see yields go below 1.50% for the first time since early March. 

Another market surprisingly in a range is Bitcoin. It basically has settled into a range the last few weeks between $35,000 to $40,000. As of this writing, it is $37,000. 

Economic Indicators

The big number on the economic calendar this week is the Consumer Price Index (CPI) on Thursday. The Labor Department’s May consumer price index (CPI) on Thursday will show the latest on these price trends for the average American. Consensus economists are looking for the index to register a 0.4% month-on-month increase after a 0.8% surge in April. The headline CPI is expected to jump 4.7%, or by the most since 2008. The core CPI, or more closely watched measure excluding volatile food and energy prices, is expected to rise 0.4% month-on-month and 3.4% year-on-year. The latter would mark the greatest jump in nearly three decades. 

Did you know that active managers are having a great year? According to BofA Securities Inc., U.S. large-cap funds had their best month in a while, and their best May on record. It wasn’t just the month of May either. An impressive 80% of them are now ahead of the Russell 1000 index for the year to date. These numbers shouldn’t be too surprising given the aforementioned performance numbers of the average stock versus the broad market. If you want to hear about a portfolio recipe utilizing dynamic strategies, check out this week’s Dynamic Portfolio Recipe featuring Ocean Park and Brinker’s Destinations strategy.

More Resources

Speaking of Brinker Destinations, the next episode of Orion’s Weighing Machine published this week will feature Amy Magnotta of Brinker Destinations. Check it out!

For more resources on the economy and markets, including partner content, please review the Orion Portfolio Solutions Financial Advisor Success Hub.

As always, please let me know if you have any feedback or questions. You can reach me at rusty@orion.com. 

Have a great week!

1802-OPS-6/7/2021

The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute — the largest global association of investment professionals. To learn more about the CFA charter, visit www.cfainstitute.org.

The CMT Program demonstrates mastery of a core body of knowledge of investment risk in portfolio management. The Chartered Market Technician® (CMT) designation marks the highest education within the discipline and is the preeminent designation for practitioners of technical analysis worldwide. To learn more about the CMT, visit https://cmtassociation.org/.