Markets Set New Highs on Sleepy Trading

August 13th, 2021

Markets climbed once again this week with both the Dow Jones Industrial Average and S&P 500 jumping to new highs. Sentiment remained positive on the Street as the Senate passed a procedural vote on the $1 trillion bipartisan infrastructure package and as signs emerged that consumer pricing pressure may be easing somewhat. These developments managed to offset concerns over the ongoing rise in producer prices. China’s July trade data, while still very positive, did take a notable hit from the growing number of Covid cases around the world as both exports and imports slowed during the month.  For investors this week, the focus was really on the billions in domestic, fiscal spending set to hit companies’ bottom lines in the coming months and on optimism as we approach the critical back-to-school and holiday shopping seasons. With many traders stealing a final vacation prior to schools reopening, volume was light but that did not prevent the Dow and S&P 500 from adding 1.66% and 0.71%, respectively, while setting new highs in the process.

A Tale of Two Inflation Reports
The July CPI report showed nascent signs that consumer pricing gains may be slowing. The CPI index rose 5.40% for the 12 months ended in July, which is flat compared to June. Stripping out volatile food and energy, core consumer prices were up 4.30% year-over-year (yoy) in July- slightly below June’s increase. Month-to-month, consumer prices also showed signs of easing with prices higher by 0.50% in July, slower than June’s 0.90% rise. Core prices also eased in July, rising 0.30%, down from the previous month’s 0.80% gain. An increase in shelter, food, energy, and new cars were the major contributors to the index’s rise. However, used cars, which have been a hot ticket item throughout the pandemic, saw price growth slow in July, up 0.20%. That’s down from the 7.30% rise in each of the previous three months.
While consumers saw prices decelerate somewhat in July, producers continued to experience rising prices under the strain of strong demand, supply chain constraints, and raw materials shortages. The producer price index (PPI) rose 7.80% yoy in July – the highest level reached since the measure was introduced just over a decade ago. Core prices less food, energy, and trade rose 6.10% from the year ago period. For the month, producer prices were up 1.00% while core prices rose 0.90%. Almost three-fourths of the increase in July PPI was driven by a record 1.10% jump in the price of services such as airlines and accommodation. Despite the record high for producer prices, investors for the most part sided with the CPI report.  Markets widely accept inflationary pressures will ease in the coming months as consumer demand returns to normal patterns once we head into the fall.
Covid Hits China Trade
Growing Covid delta variant cases throughout the world, as well as outbreaks within China’s borders itself, led to a decline in exports and imports in July. Export growth slowed to a 19.30% yoy rise for the month. That was down from June’s 32.20% yoy increase. Meanwhile, imports slowed to a 28.10% increase from year ago levels, down from June’s 36.70% yoy rise. In recent weeks, factory output in China has been hit with Covid outbreaks in the country’s eastern and southern provinces. These are the country’s main export hubs. Supply chains have also come under pressure recently as China has reinstated austere Covid measures. Just this week China partly shuttered the world’s third-busiest container port, where about forty container vessels are now waiting to anchor in the port. This is up from the 30 ships that had been waiting just three days ago. Although ships are trying to be re-routed to other ports, they are facing some of the worst congestion seen in at least three years. Further delays could lead economists to revisit their China 2021 GDP forecasts of 8.00%, and potentially alter holiday sales forecasts globally given that a good deal of those goods are shipped during July and August.  
The dog days of summer are upon us, tainting the market with a measure of lethargy. Trading volume declined approximately 28% this week relative to its average daily volume this year. The overall bias, however, remains positive, fueled in large part by the Senate’s passage of the $1 trillion infrastructure deal to fund transportation, power grid updates, broadband, and cybersecurity. This, in conjunction with the fact that nearly 86% of S&P 500 constituents have beat their analysts’ estimates, has convinced investors that markets have more room to run. The macro forces in play make it hard to bet against that position right now – even with equities feeling as expensive as they seem.

The Week Ahead

Back-to-school shopping should help lift July retail sales. We’ll also check in on the real estate market as the latest figures on housing starts are released.


The Perseids Peak This Week

This month, the Perseid meteor shower is lighting up the night sky. The meteor shower is visible every year from around July 17th to August 24th and peaks around August 13th. The Perseids are produced by debris from the Swift-Tuttle comet, which is  the largest solar system object to pass close to Earth repeatedly. Swift-Tuttle is a 16-mile-wide ball of dust, ice, and rock. It was discovered in 1862 independently by both Lewis Swift and Horace Parnell Tuttle, hence the name. Its debris stream contains particles that are a bit larger than those in an average comet or asteroid debris stream so they tend to produce brighter meteors.
According to NASA, approximately 30 meteor showers occur each year that are visible to observers on Earth. The Perseid meteor shower was first observed in China about 2,000 years ago. When viewing conditions are good, sky watchers can expect to see as many as 30 to 100 meteors blazing overhead each hour during the Perseids. Ideal viewing conditions are clear, dark skies, and specifically International Dark Sky Parks, which we wrote about here, but you should be able to view the Perseids in an area away from light pollution. Viewers don’t need any special equipment: the naked eye is fine. Another component to ideal viewing is the phase of the moon. Too much moonlight can obscure a meteor shower. This year, the moon will be in a waxing crescent phase and will set several hours before the celestial fireworks really begin so conditions are ideal for the 2021 Perseids.
Meteor showers occur when the Earth crosses through fields of cosmic debris shed by passing comets and asteroids. Particles from asteroids or comets collide with the Earth’s atmosphere at speeds up to 133,000 mph and burns up in a brilliant flare of light — a Perseid meteor. Meteor showers are named after the constellation from where the shower appears to be coming from, known as the radiant. The Perseids is named after the constellation Perseus the Hero. In ancient Greek star lore, Perseus is the son of the god Zeus and the mortal Danaë. It is said that the Perseid shower commemorates the time when Zeus visited Danaë in a shower of gold.
When watching meteor showers, viewers are seeing meteors ejected from the parent comet from earlier orbits – not the comet’s most recent orbit. This is because it takes time for debris from a comet’s orbit to drift into a position where it intersects with the Earth’s atmosphere. 
The Perseids is one of three ideal meteor showers that can be seen in 2021. The good news is that it is also the first, so there are two more chances to catch a celestial show, including the Draconid meteor shower that will peak around October 8-9th, and the South Taurid meteor shower on November 4-5th. 

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