Capital Market Comment
July 28, 2021
Frank Mastrapasqua, Ph.D.
Principal, Chairman & Chief Investment Officer
What is Going On?
The daily market swings have been a source of confusion to many market participants. Is it a correction or a pullback? Do you go from growth to value or value to growth? Consumer discretionary to consumer staples, or consumer staples to consumer discretionary? Technology to industrials, or industrials to technology? The list goes on.
Some stocks and sectors have corrected by more than 10%, but the averages have held up fairly well, with declines of less than 5%. Subsequently, they have recovered sharply. A confluence of forces has converged to undermine many widely accepted forecasts and themes.
Despite the high rate of inflation reported for June, 5.4% vs. a year ago, long-term rates have moved down, with the 10-year Treasury falling below 1.20% before recovering to 1.30%. Also, the 30-year Treasury dipped to 1.90% at the same time the dollar has strengthened vs. a basket of currencies. These developments have been inconsistent with the view of many investors and forecasters.
The virus has added an element of uncertainty, not just about the health effects, but also about the public policy response and how it may undermine economic growth.
On the fiscal policy front, the infrastructure bill has yet to be drawn up and the $3.5 trillion budget proposal has not been adequately scrutinized.
On the monetary policy front, Federal Reserve policy will be taking center stage, particularly over the next several months.
This week, on July 27th and 28th, the Federal Open Market Committee (FOMC) is meeting to begin discussing the nature of the upcoming plan to taper its bond buying. In August, the Kansas City Fed monetary forum in Jackson Hole will take place, and much will be made of the outcome of the research that is presented and if there are further insights into future Fed policy. The September FOMC meeting will take on further significance.
The level of foreign interest rates is inconsistent with the risk of inflation. Ten-year bond rates in Germany, Japan, France and Italy are -0.40%, 0%, -0.08%, and 0.63%, respectively. These rates against the backdrop of a stable, stronger dollar have fostered fund flow into the U.S. The ECB gives no indication that they are deviating any time soon from its current easy money policy, thus driving rates lower.
Another major phenomenon is the record $900 billion global investors have poured into U.S. domiciled mutual and exchange traded funds in the first half of the year. For the retail investor, there appears to be $17 trillion on the sidelines. No rate of return on cash continues to be a problem for many investors and it is not likely to change for some time, even when tapering begins. The federal funds target will stay near zero – an anchor on short-term interest rates. Consequently, market dips tend to attract buyers.
The other force driving the market is the reemergence of stock buybacks. According to JP Morgan, buybacks could top $1 trillion on a 12-month basis.
Against the background of retail cash, worldwide liquidity, and corporate cash (fuel for buybacks), profits continue to power ahead with over 88% of the S&P 500 companies that have reported thus far have exceeded estimates.
The uncertainties that currently exist and some new ones that are likely to emerge can easily induce volatility.
Over the medium to long-term, in our judgment, investing in enduring themes offers the best opportunities. Sentiment, psychology, and fear certainly play a role, particularly over the short-term. The emerging China factor (repressive actions in numerous sectors of the market) is a new element impacting parts of the capital markets. However, focusing upon company fundamentals and the resiliency of the managements that continue to weather the pandemic in the midst of changing international dynamics, provide a firm foundation for the equity market.
Mastrapasqua Asset Management, Inc. does business as M Capital Advisors. If you have a question or need further information, please contact:
Patrick Snell , CFA, CAIA Principal & Portfolio Manager in Nashville at 615-866-0075, firstname.lastname@example.org
Claude Koontz, CFA, Principal & Portfolio Manager in San Antonio at 210-353-0519, email@example.com
© 2021 Mastrapasqua Asset Management, Inc. All rights reserved.
The information and opinions contained in this report should not be treated as fact or as insight that will produce desired investment results over time. Investment conclusions always bear risk, and that risk may not be reasonable for any particular reader. Obviously the writer, even assuming good intentions, does not know of the reader’s particular financial circumstance and therefore is not able to assess the propriety of whether a named security makes sense as part of a given individual, family, or institutional portfolio. Mastrapasqua Asset Management clients may, from time to time, own some of the companies mentioned. We hold out no duty to give readers of this column advanced notification of when we may change an opinion. Investors should receive investment advice based on an assessment of their own particular investment circumstances and not on the basis of recommendations in this report. Past performance is not indicative of future returns.