Stocks take a vacation

  • Banks kick off earnings season with beats, but shares mostly slump
  • Fed continues to pledge restraint as inflation ticks higher
  • This week: Housing data, TSLA and NFLX earnings

The US stock market snapped a three-week win streak amid higher-than-expected inflation data and soggy bank-stock performance—as well as a warning of potential weakness from the Cboe Volatility Index (VIX).

A stronger-than-expected retail sales number on Friday initially looked like it could give stocks a chance to turn the week around, but an early rally fizzled and the S&P 500 (SPX) stumbled into the weekend:

Chart 1: S&P 500 (SPX), 5/26/21–7/16/21. S&P 500 (SPX) price chart. Mild pullback.

Source: Power E*TRADE

The headline: Inflation continues to rise, stocks drift lower.

The fine print: The Consumer Price Index (CPI) and Producer Price Index (PPI) both increased more than expected in June, but the market didn’t appear overly fazed. Mitigating factors: A surge in used car prices was responsible for a big chunk of the CPI’s jump (its biggest in 13 years),1 and Fed Chairman Jerome Powell, while acknowledging inflation was likely to remain elevated for a while, again stated his belief that it would eventually ease up, and that the Fed wasn’t anywhere close to tightening monetary policy.2

The quote: "I think we will have several more months of rapid inflation. [B]ut I think over the medium term, we'll see inflation decline back to a normal level." Treasury Secretary Janet Yellen, echoing Jerome Powell’s sentiments on inflation, although she also expressed worry about high housing prices.3

The scorecard: Small-caps extended their slide—the Russell 2000 (RUT) now has the smallest year-to-date return among the major US indexes:

US stock index performance table for week ending 7/16/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE

Sector roundup: The strongest S&P 500 sectors last week were utilities (+2.6%), consumer staples (+1.3%), and real estate (+0.7%). The weakest sectors were energy (-7.7%), consumer discretionary (-2.6%), and materials (-2.4%).

Highlight reel: On Monday, State Auto (STFC) +191% to $50.22 and Tempest Therapeutics (TPST) +54% to $24.19. On the downside Meridian Bioscience (VIVO) -23% to $17.35 on Tuesday, Glaukos (GKOS) -21% to $57.82 on Wednesday.

Futures action: August WTI crude oil (CLQ1) suffered its second-consecutive weekly loss, closing Friday at $71.45/barrel, as OPEC and its allies reportedly resolved their latest disagreement on production levels.2 August gold (GCQ1) hit a one-month high of $1,835/ounce last Wednesday and logged its fourth-straight up week despite selling off on Friday to $1,811.

Coming this week

The pace of earnings picks up this week. Tesla, Twitter, and Netflix are among the headliners, along with more airlines…and lots more (regional) banks. Here’s a sample:

Today: AutoNation (AN), International Business Machines (IBM), J.B. Hunt Transport (JBHT), Wintrust (WTFC), Cal-Maine Foods (CALM), Steel Dynamics (STLD), PetMed Express (PETS), Teradyne (TER), Lennox International (LII)
Tuesday: United Airlines (UAL), Halliburton (HAL), Citizens Financial Group (CFG), Tesla (TSLA), Intuitive Surgical (ISRG), Teledyne Technologies (TDY), Netflix (NFLX), Philip Morris (PM), Signature Bank (SBNY)
Wednesday: Baker Hughes (BKR), Coca-Cola (KO), Whirlpool (WHR), Verizon (VZ), Crown Castle (CCI), Citrix Systems (CTXS), Scientific Games (SGMS), Texas Instruments (TXN), Johnson & Johnson (JNJ)
Thursday: American Airlines (AAL), Southwest Airlines (LUV), Abbott Laboratories (ABT), AT&T (T), Biogen (BIIB), Cleveland-Cliffs (CLF), Intel (INTC), Newmont (NEM), Domino's Pizza (DPZ), D.R. Horton (DHI), Freeport-McMoRan (FCX), Snap (SNAP), Twitter (TWTR), Verisign (VRSN)
Friday: American Express (AXP), Kimberly-Clark (KMB), Honeywell (HON), Schlumberger (SLB)

This week’s housing numbers may shed some light on whether last month’s shift in sales data was a fluke or the possible beginning of a new trend:

Today: NAHB Housing Market Index
Tuesday: Housing Starts and Building Permits
Thursday: Existing Home Sales, Leading Indicators
Friday: Markit Manufacturing PMI (flash), Markit Services PMI (flash)

IPOs include:

Tuesday: HCW Biologics (HCWB)
Wednesday: CS Disco (LAW), Kaltura (KLTR), PAYCOR (PYCR)
Thursday: Instructure (INST), Ryan Specialty Group (RYAN), VTEX (VTEX), Zenvia (ZENV), Zevia (ZVIA), Couchbase (BASE)
Friday: Outbrain (OB), Ocean Biomedical (OCEA)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Rotating rotation?

When the Russell 2000 (RUT) closed at a record high of 2,360.17 on March 15 (vertical dashed line), its YTD return stood at 20%—around 14 percentage points more than the SPX and 19 more than the NDX, which was struggling to escape from negative YTD territory:

Table: S&P 500 runs of higher monthly highs/closes, 1985–present

Source: Power E*TRADE

Four months later, the picture appears to be transformed. The RUT’s sharp sell-off so far this month has dropped the small-cap index—which had really done no more than move sideways since mid-March—below both the SPX and NDX, as the former index claimed the top spot for the year, and the latter has staged a remarkable rebound from the not-so-long-ago days when the rotation away from growth stocks and into value was the dominant market story.

In a little more than the two months since the May 12 market lows, the NDX has gained around 13%—more than twice as much as the SPX. Around the same time, longer-term interest rates—which had pressured growth names earlier this year by pushing to their highest levels in 15 months—accelerated their pullback. Suddenly, one of the weights around the neck of growth stocks seemed much less heavy—and the NDX responded accordingly.

That’s far from being the end of the story, though.  As our colleagues at Morgan Stanley have pointed out, a renewed uptrend in long-term rates could reapply pressure to the growth stocks that have done so well the past couple of months.


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1 Inflation just jumped the most in years, yet markets are largely ignoring it. Here’s why. 7/13/21.
2 The Wall Street Journal. Powell Expects Inflation to Moderate, but Will Likely Remain Elevated This Year. 7/14/21.
3 Reuters. Yellen says concerned about housing prices but inflation to calm. 7/15/21.

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