This blog will serve as follow up to our previously released Q3 Investment Themes and is intended to provide an update on what we are seeing as well as our current outlook. 


Here are the top three things we are covering in this week’s blog:

  1. The U.S. markets continued to surge higher in the first month of Q3, but other countries across the globe are being hit hard by Quad 3 slowing.
  2. Despite concerns of another COVID shutdown, the employment outlook improved in July with both jobs added and unemployment rate coming in better than expectations.
  3. While the market is defiantly performing well now, we are watching closely for any sudden phase transition.

Market

The story across the three major US indexes was similar for the month of July despite some variance in performance. Although all began the month strong and finished positive, they had to recover from a sharp decline in the middle of the month as the market responded to the headlines revolving around the new delta variant and its potential hinderance on growth of the US economy. Even with the small speed bump, the S&P returned 2.27% for the month[1]. The Dow was hit harder but managed to recover to finish up 1.25%[2]. Despite beginning the year with some turbulence, the Nasdaq 100 has been the leader as of late and closed July up another 2.75%[3].

Across the Atlantic, Quad 2 remained in place with European equities surging 1.83% to close out another strong month[4]. With many European countries being the last to fully reopen, their markets are now experiencing the heights of Quad 2 that helped to propel U.S. equities higher during Q2.

On the other hand, China’s early reopening has now run full cycle and the growth is now beginning to slow. Additionally, a newly enforced regulatory regimen caused a sudden selloff in healthcare and technology stocks[5]. Chinese equities finished the month well into correction territory, down over 13.8%, and demonstrated just how rapidly a deep crash can occur if economic and political concerns erupt simultaneously[6]. The selling in China sent shockwaves through all global equities and led to a consolidation of 6.61% in Emerging markets overall[7].

Since the Peaking in April, the 10 Year Yield has continued trending lower. After beginning the month at 1.48%, the steep fall to 1.24% represents a slowing in the overall confidence in the economy[8].

Economy

On the economic front, total claims for unemployment fell in the month of July to just over 13 million[9]. This represents a fall of over 18.5 million from one year ago and provides some support that the economy is in fact recovering. While this is a positive sign, the overall claims remain well above pre-pandemic levels and present some major concerns for the long-term strength of the economy.

Despite fears of another wave of COVID lockdowns, the employment situation continues to improve. The U.S. economy added 943,000 jobs in July, coming in well above estimates of 845,000[10].

Additionally, the unemployment rate decreased to 5.40%, beating estimates of 5.70%. Overall, this was a very positive report, but concerns remain with many fearing the possible consequences of a renewed COVID shutdown[11].

Corporate earnings accelerated further in the first part of Q3, with every industry showing massive overall growth. Leading the pack was Consumer Discretionary and Industries which posted earnings growth of 459.01% and 788.53% respectively[12].

Coming off the lows from Q2 of 2020, GDP surged to 12.20% on a YoY basis during the second quarter[13]. While these readings are certainly bullish in the near term, the soft YoY data is now behind us, and GDP growth estimates for Q3 are expecting a slowdown to 6.47%.

YoY CPI also showed massive growth, accelerating to 5.40%. Similar to GDP, we are likely to see a deceleration in CPI in future quarters as the YoY comparisons begin to steepen. However, estimates do expect CPI to remain elevated as we move towards a period of sticky stagflation[14].

One interesting data point we are closely monitoring is the job quits rate. With the emergence of work from home, increased unemployment income and the economic reopening, workers are now gaining back some leverage. This has been clearly illustrated through the jobs quits rate, which has spiked in recent months to all time highs as workers now feel more confidence leaving their current job in search of one with better benefits[15].

Summary

  1. Coming off a strong Q2, the market has a lot of momentum to continue making a run higher.
  2. However, concerns persist with many of the economic and political tailwinds likely to flip to headwinds with the expected slowing of growth and the increasing need for long term fiscal support.
  3. After a massively bullish year, the market is set to face tougher challenges in the months to come. With much of the historic YoY economic data in the rearview, the catalysts for additional market appreciation will begin to fade. Unlike in recent periods when everything in the market seemed to go up at the same time, we could begin to see scenarios where niche industries outperform while other facets of the market underperform.

We hope you have enjoyed getting a deeper look into our investment research and look forward to providing this to you each quarter going forward. Thank you from the entire Konvergent Team!


[1] Slide 4: S&P 500 Bullish Run Continues

[2] Slide 6: Dow Jones Finishes Positive

[3] Slide 5: Nasdaq 100 Spikes Higher

[4] Slide 14: European Equities Jump

[5] China health stocks slammed as investors fear regulators’ diagnosis | Nasdaq

[6] Slide 13: Chines Equites Collapse

[7] Slide 12: Emerging Markets Drop

[8] Slide 15: US 10 Year Yield Falls

[9] Slide 17: Total Claims

[10] Jobs report July 2021: Payrolls increase by 943,000, unemployment rate slides (cnbc.com)

[11] Slide 18: Unemployment Report

[12] Slide 19: Corporate Profits

[13] Slide 20: GDP & Inflation

[14] Slide 21: GDP & Inflation Estimates

[15] Slide 22: Quits Rate

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