Sightline Weekly Market Update: Consumer Sentiment’s Surprising Slump
The equity markets ended the week mixed with large-cap and value stocks providing growth and small-cap leadership under pressure. Gains were broad-based, with most sectors gaining during the week. Energy stocks dropped on concerns from the supply side and worries increasing delta variant cases might slow demand in later months.
The TSX lost 29 points or 0.14% on the week; S&P gained 0.71% and the Dow Jones up 0.87% (the Dow is thought to reflect the foreign interest in US equities, whereas the S&P is believed to be domestic). The Nasdaq lost nine basis points on the week on the decline from the information technology sub-sectors semiconductors and semiconductor equipment industry. The S&P 400 Mid-cap index gained 0.52%, and the Russell 2000 index lost 1.10% on the week. For the first time in many months, European investors focused on the economy reopening rather than covid protesting and cases. France’s CAC rose 1.16%, Germany’s DAX advanced 1.37%, the UK’s FTSE gained 1.34%, and the Italian FTSE MIB jumped 2.51%.
In economic news last Monday, the US Department of Labor reported job openings on the last business day of June rose by 590,000 or 6.5% to 10.1 million.1 The increase beat an Econoday survey of economists expecting job openings to increase to 9.29 million.2 Several industries reported increases led by professional and business services (+227,000); retail trade (+133,000); and accommodation and food services (+121,000). For the first time in six months, hiring outpaced openings with new hires hitting 6.7 million (+697,000).3 The southern region continues to lead in hires. In June, the quits rate increased to 3.9 million, a 2.7% increase. The quits rate is a “measure of the worker’s willingness or ability to leave jobs.”4 A strong quit rate measures workers’ ability to find better paying or more accommodative employment in periods of surplus job openings.
Last Tuesday, the NFIB small business confidence index fell in July by 2.8 points to 99.7. The small business confidence index is an indication of small businesses’ confidence in economic strength. Further, the business owners’ survey of business conditions over the next six months reported a deterioration. The survey said the index fell by eight points to a negative 20%. As written in past weekly comments, the ability to staff positions and supply chain disruptions top the list of concerns. Additionally, 46% of businesses in wholesale, manufacturing, and retail reported increasing prices. On the wage front, 27% expected rising wages over the next three months, a 48-year record high.5
The Labor Department released the latest CPI reading gaining 0.5% for July, down from the June reading of 0.9%. For the 12 months ending July, the inflation rate remains at 5.4%. Energy – a closely watch CPI component – rose 1.6%, food 0.7% following 0.8% in June, and rent equivalent climbed 0.3%. Used car prices, responsible for significant inflation increases jumping 30% over the March-to-June period, slowed in July increasing only 0.2%. The latest inflation reading supports the Fed’s argument that the latest bout of inflation is indeed transitory.6 On Thursday, the initial unemployment claims decreased by 12,000 to 375,000 for the week ending August 7. Continuing claims for the week ending July 24 were 12,055,290 dropping 919,593 from the previous weekly reporting period.7 Despite concerns over the delta variant, the employment picture is improving. With the federal unemployment benefits set to expire in September, many expect an acceleration of the return to work as we head into the fall and winter.
On Friday, the UMich Consumer Sentiment report was a real shocker, with an August preliminary reading of 70.2 compared to a July reading of 81.2. The latest reading is the lowest since December 2011, and over the last 50 years, only two declines were more significant, the 2007-2008 decline and in April 2020 at the very beginning of shutdowns.8 Some analysts are suggesting consumers are concerned over the surge in the delta variant and the resulting performance of the economy. If consumer sentiment causes a change in spending, it could present a challenge to the Fed wishing to relax the current easy policy position.
While the rapid growth experienced earlier in the year is expected to slow, there is a significant concern of government interference as the country becomes more divided and the resulting impact on the economy’s strength. Covid and the delta variant impose many challenges for government and businesses alike as they move into what some circles expect to be a tumultuous 2022. If history is any guide, the resolution will not be easy, and the result could be increased volatility as we navigate the economic, social and political waters ahead.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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