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Key Points for the Week
The benefits provided by recent stimulus packages seem to be fading. U.S. retail sales dipped 1.1% last month and have now declined in two of the last three months [Figure 1]. Declines in motor vehicle and online purchases led the fall. Restaurant sales grew 1.7% in July and continue to rebound. Federal Reserve minutes indicated the economy looks strong enough for the central bank to taper bond purchases in the coming months.
China’s economy seems to be slowing under the pressure of resurgent COVID cases and increased costs. In July, Chinese retail sales rose 8.5% but missed economists’ expectations for 10.5% growth. Industrial production also missed expectations, rising 6.4%. Analysts had expected output to rise 7.8% after growing 8.3% in June.
The S&P 500, without dividends, doubled from the COVID lows in March of last year, based on Monday’s close. Typically, the market takes 1,000 trading days to double from a low. The bottom on March 23, 2020, was surpassed in only 354 trading days.
After doubling the COVID low on Monday, stocks retreated. The S&P 500 shed 0.5%. Global stocks fared worse as the MSCI ACWI sagged 1.8%. The Bloomberg BarCap Aggregate Bond Index added 0.2%. U.S. home sales and core PCE inflation head the list of key economic data reporting this week.
The U.S. economy continues to make a slightly bumpy transition from COVID-led stimulus to a self-sustained reopening. The bumpiness popped up again this week as retail sales missed expectations of -0.3% and instead declined 1.1% [Figure 1].
The underlying data was even more bumpy. On the positive side, restaurants added another 1.7% in growth last month and sales have risen 38.4% during the last year. Gas station sales benefited from higher prices, and sales rose 3.5% in July. Gas sales have increased 37.5% during the last year. Negative contributors were led by motor vehicle and parts dealers, which experienced a 3.9% decline as the microchip shortage continues to plague auto dealers.
Figure 2, below, shows concerns about the decline in retail sales may be over. The top dark line shows retail sales climbed steadily until the pandemic started. After a sharp decline, sales have rebounded and are above the trend in earlier years. So, even though sales are falling, the absolute level implies the economy continues to make up for transactions lost during the pandemic.
Figure 2 also shows some other important trends. The second line from the top excludes sales of motor vehicles and parts. The decline in sales was much smaller if the industry most affected by the microchip shortage is excluded. As additional chips are manufactured, vehicle buyers are likely to make up for missed purchases.
Sales data will also be bumpy as consumers remain worried about the risks of venturing out. The Delta variant is likely to pressure sales in August. Increased social distancing will put additional pressure on sales at the same time as efforts are made to ramp up new car production.
Markets were shaken last week by a potent cocktail of central bank tapering and economic growth concerns mixed with coronavirus and the new Chinese privacy law.
On Wednesday, the minutes of the United States Federal Reserve’s Open Market Committee Meeting were released. They confirmed the Fed could begin tapering – buying fewer Treasury and U.S. government agency bonds – sooner rather than later, reported Jack Denton and Jacob Sonenshine of Barron’s. While that wasn’t new information, investors expressed concern which triggered a broad sell-off.
In the United States, economic data was mixed. The U.S. Census reported that retail sales declined in July, suggesting weakening consumer demand. Normally, that’s not great news because consumer demand drives U.S. economic growth. However, with inflation at the highest level in more than a decade, lower demand could help relieve this upward price pressure.
Lower consumer demand was accompanied by improving supply. Lisa Beilfuss of Barron’s reported:
…business inventories rose in June at the fastest clip since October as wholesalers and manufacturers posted solid increases and retailers saw inventories rise for the first time in three months. From a year earlier, inventories across American businesses rose 6.6%, compared with a 4.6% pace a month earlier.
Lisa Beilfuss, Barron’s
Of course, we could see supply bottlenecks again if a COVID-19 surge results in new lockdowns and continued worker shortages.
Finally, on Friday, Chinese stocks dropped sharply after Beijing announced that a new strict data-privacy law will take effect on November 1, 2021. Investors remain concerned that China’s regulatory tightening will affect other market sectors, including fintech, gaming and education, reported Hudson Lockett of the Financial Times.
American investors’ shock at an ongoing regulatory crackdown in China points to a fundamental difference between the two countries,” reported Evelyn Cheng of CNBC. “…whereas the U.S. system is designed to let corporations influence the government, China’s system is designed to bring corporations in line with government goals.
Hudson Lockett, Financial Times
Major U.S. stock indices finished the week lower. The yield on 10-year U.S. Treasuries finished the week where it started.
|Data as of 8/20/21||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor's 500 (Domestic Stocks)||-0.6%||18.3%||31.2%||15.8%||15.3%||14.7%|
|Dow Jones Global ex-U.S.||-3.5||4.4||20.8||6.4||6.6||4.6|
|10-year Treasury Note (Yield Only)||1.3||NA||0.6||2.8||1.5||2.1|
|Gold (per ounce)||0.3||-5.8||-7.7||14.5||5.9||-0.5|
|Bloomberg Commodity Index||-4.2||16.8||27.0||3.0||1.3||-5.5|
Sources: Yahoo! Finance; MarketWatch; djindexes.com; Federal Reserve Bank of St. Louis; London Bullion Market Association.
The COVID-19 pandemic caused many people to reconsider how and where they want to live. People relocate for a variety of reasons. They may want to be closer to family and friends, live in a more affordable place with lower taxes or have better employment opportunities.
Another reason people relocate is climate. While many people move to regions with better climates, today they also are avoiding areas with high climate risk, reported a 2021 survey from RedFin.
About half of respondents who plan to move in the next year said extreme temperatures and/or the increasing frequency or intensity of natural disasters played a role in their decision to relocate. More than a third (36%) said rising sea levels were a factor.
2021 survey from RedFin
Those who planned to move and lived in the northeastern and southern U.S. were most concerned about the frequency and intensity of natural disasters, while those in the West were most concerned about extreme temperatures. The two factors tied for most serious concern in the Midwest.
The importance of climate change to relocation decisions varied by age. People age 55 and older were less likely to factor climate risk into relocation decisions, while younger respondents, especially 35- to 44-year-olds, prioritized climate risk issues.
When all respondents, regardless of whether they intended to move, were asked whether natural disasters, extreme temperatures or rising sea levels would affect their decision to buy a home, the majority said they would hesitate to buy homes in areas with these issues (79%, 75% and 76% respectively).
Home buyers aren’t the only ones thinking about climate risks. A real estate developer told Swapna Venugopal Ramaswamy of USA Today:
…real estate investors such as banks and insurance companies used climate risk data to inform their investing decisions.
Swapna Venugopal Ramaswamy, USA Today
It seems that climate risk is becoming a factor in personal and business investment decisions.
August 24, 79 AD: Mount Vesuvius Erupts
At noon on August 24, 79 A.D., Mount Vesuvius erupted in southern Italy, devastating the prosperous Roman cities of Pompeii and Herculaneum. For the next 12 hours, volcanic ash and a hail of pumice stones up to 3 inches in diameter covered Pompeii, forcing the city’s occupants to flee. Some 2,000 people stayed in Pompeii, holed up in cellars or stone structures, hoping to wait out the eruption.
The eruption lasted 18 hours and resulted in Pompeii being buried under 14 to 17 feet of ash and pumice, and the nearby seacoast was drastically changed. Herculaneum was buried under more than 60 feet of mud and volcanic material. Some residents of Pompeii later returned to dig out their destroyed homes and salvage their valuables, but many treasures were left and then forgotten.
Today, Mount Vesuvius is the only active volcano on the European mainland. Its last eruption was in 1944 and its last major eruption was in 1631. Another eruption is expected in the near future, which could be devastating for the 700,000 people who live in the “death zones” around Vesuvius.
The evidence on climate risk is compelling investors to reassess core assumptions about modern finance... Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds... How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts? Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk.
Larry Fink, Chairman and Chief Executive Officer of BlackRock
I have never been modest enough to demand less of myself.
Friedrich Nietzsche, German Philosopher
The past is never where you think you left it.
Katherine Anne Porter, American Journalist
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
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