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BMT Monday Market Insights – July 19, 2021

Top Weekly Themes

  1. Inflation running hot but will it last? Last week we received the June details on the Consumer Price Index (CPI) and Producer Price Index (PPI), two important data series on inflation. Core CPI, which excludes food and energy, rose 90 basis points (0.90%) month-over-month, or more than double the consensus estimate of 40 basis points (0.40%). The June reading was the largest monthly increase since June 2008 and was an acceleration from the 0.70% month-over-month recorded in May 2021. Similarly, the June Producer Price Index (PPI) increased a more aggressive 1.0% in June from May, compared to expectations of 0.50%. While the topline numbers grab headlines and spark fears of runaway inflation, we prefer to dig a bit deeper to examine the issue. For example, used car and truck prices moved higher again in June at a brisk 10.5% month-over-month pace and drove over half, or 0.50%, of the Core CPI’s 0.90% increase. In our view, used vehicle prices are not likely to maintain this rapid rise brought on by government stimulus and a lack of new vehicle inventory. We continue to expect the current bout of inflation to subside as production bottlenecks are cleared.
  2. Earnings Season Kicks Off in Earnest. The second quarter earnings season kicked off last week with many financial institutions and consumer stocks. It remains early days but as of the morning of July 15, results have been positive. Of the thirty companies that had reported by that date, 90% of them have beat earnings per share (EPS) and sales estimates. Financials, which represented the bulk of our earnings calls last week, have reported better than estimated EPS results. In general, banks are delivering stronger EPS numbers largely due to reversals of loan loss provisions taken last year during the economic downturn. However, these are not what we would deem sustainable earnings. While they are strong in financial health, banks really need loan growth to return and the interest rate curve to steepen to deliver consistent earnings growth, a phenomenon we expect to occur as we move throughout 2021.
  3. Growth Beyond Our Borders. China reported a weaker than expected second quarter Gross Domestic Product (GDP) growth rate of 7.9%, compared to an expected 8.1%. Although the second quarter was a bit soft, the country appears to be on the path to meet its target of annual growth of 6% or greater. However, there remain risks on the horizon with the U.S. consumer reallocating spend away from goods to services as well as geopolitical issues between China and the West. It is paramount to keep a close eye on China as it represents a significant weight in Emerging Market equity indexes, an area we remain underweight in our BMT Custom Equity Portfolios.

Returns Table

EquitiesWeek(%)YTD(%)1-Year(%)3-Year(%)5-Year(%)Div Yield(%)
S&P 500(0.7)20.533.717.6518.051.28
Russell 1000 Value(0.6)18.835.610.8311.721.87
Russell 1000 Growth(0.8)20.434.124.3824.360.66
Russell 2000(0.6)13.946.710.5114.220.91
MSCI EAFE(0.3)12.827.210.1910.522.43*
MSCI EM (Emerging Markets)(1.8)1.618.510.6510.562.07*
Fixed IncomeWeekYTD1-Year3-Year5-YearDiv Yield
Bloomberg Barclays US Aggregate0.4(0.4)0.05.723.291.42
Bloomberg Barclays US High Yield – Corporate0.35.010.97.176.863.75
Bloomberg Barclays Municipal Bond0.11.63.45.263.450.96
Bloomberg Barclays Global Aggregate x US (Country)0.4(3.1)1.04.102.100.85
CommoditiesWeekYTD1-Year3-Year5-YearCurrent Level
Crude Oil WTI (NYM $/bbl) Continuous4.849.689.71.710.672.6
Natural Gas (NYM $/mmbtu) Continuous11.1116.2131.225.413.35.5
Gold NYMEX Near Term ($/ozt)0.1(5.3)(8.4)14.56.41,792.4
Copper Cash Official LME ($/mt)2.522.639.316.915.09,488.5
Currencies1 Week AgoYTD1-Year Ago3-Years Ago5-Years AgoCurrent Level
U.S. Dollar per Euro1.181.221.191.171.121.18
Japanese Yen per U.S. Dollar110.34103.25105.48112.10102.40109.30
U.S. Dollar per British Pounds1.371.371.291.311.321.38
As of 9/15/21 (close). Three-year and 5-year returns are annualized. *Dividend Yield For MSCI EAFE and MSCI EM are from 8/31/2021.

Chart of the Week

Long-term Yields Continue to Slide Flattening the Yield Curve

Chart of the Week 1
Sources: BMT, FactSet, Inc.
Chart of the Week 1
Sources: BMT, FactSet, Inc.

Takeaways:

  • Since our last regular market insights at the end of June, long-term U.S. Treasury yields have continued to slide lower as the market continues to digest a hint of hawkish tone at the Federal Reserve (Fed), waning fiscal stimulus and the unknown impacts coming this fall from COVID-19 variants.
  • Short-term yields, as represented by the 2-Year U.S. Treasury, have also fallen but to a much lesser extent than the 10-Year, thus leading to a “flattening” of the yield curve or a reduction in the spread between the 2-year and 10-year, depicted in the second chart.
  • We remain firm in our belief that the yield curve should be “steeper” than it is currently. In our view, the U.S. 10-Year should be higher than current levels and we expect this slide lower to reverse course in the coming months. We expect that the Fed will remain patient in its quest to end accommodative monetary policy, the consumer will remain in good financial standing and the labor market will continue to improve.

COMMENTARY

Not Quite Normal, but Almost.

After the horror story of 2020 that brought the services industry to its knees, 2021 is shaping up to be a much better year. As can been seen in the chart from Cornerstone Macro, many of the hardest hit industries are showing a robust recovery even as “Hiring” signs fill many establishments’ windows. We would expect foot traffic to continue to improve, albeit at a slowing pace as remaining social restrictions are lifted in some states and consumers look to release their pent-up demand away from their homes. We are monitoring the potential impacts of COVID-19 variants as we head into the Fall and Winter seasons, but we do not anticipate full scale lockdowns across the U.S. again. We believe the continued transition to normal life outside the home should benefit more cyclical areas such as Value and Small/Mid Cap stocks as well as lessen the risk of holding Credit [corporate] bonds, all of which are areas we remain overweight within our BMT Custom Portfolios.

Commentary Chart
*Recovery Index: Sum of weekly Hotel, Casino, Recreation, Dining, Fitness, and Department Store patrons, nationwide.
Source: Cornerstone Macro

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