'Buy in July, make an all-time high' 'Buy in July, make an all-time high' http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\trees-sequoia-small.jpg July 9 2021 July 9 2021

'Buy in July, make an all-time high'

There are reasons it doesn't feel like a market on a roll.

Published July 9 2021
My Content

Earnings are the dominant influence on the market. The Q2 reporting season is about to get under way in earnest. In Q1, the top line grew 11% and earnings-per-share jumped 35%. But the S&P 500 only added 81 basis points during the six weeks after companies started posting results. How stocks react to highly anticipated second-quarter outperformance could make for a volatile July-August. Expectations are for S&P earnings-per-share (EPS) to jump 65% year-over-year, the most since Q4 2009. Ex-tech, the projected increase is almost 75%, with value names as a group forecast to soar more than 100%. Q2 consensus EPS already surged a record $18 from $161 to a $179 annual rate, far higher than Q1’s $11 increase off its low. Upward estimate revision momentum is at a 25-year high, with positives outnumbering negative preannouncements, suggesting corporations are confident. But upward guidance has slipped from peaks a few weeks back, and Citigroup thinks earnings revision trends look stretched. With easier comps, Q2’s certain to be the apex of the earnings growth cycle, with the rate likely to slow noticeably with the economy in the second half and into 2022. Investors will be looking for clues on what to expect next year, but a peak in earnings still appears years out.

China’s getting more prominent on that Wall of Worry. It cracked down on fintech, then almost every successful internet company, and now has its sights on Didi Chuxing. The huge ride-sharing platform drew authorities’ ire by rushing ahead with its IPO in defiance of government concerns. Gavekal Research says the Communist Party can live with disruptive technologies, but not with disruptive individuals. With the Chinese government reasserting control over overseas listings, most upcoming Chinese IPOs in the U.S. will be derailed. Tighter scrutiny and regulation await just about every major internet firm there. This tightened regulation is not simply a matter of Communist Party caprice or desire for control, as many underlying concerns there (antitrust, outsized influence, cybersecurity) mimic those in the U.S. and Europe. The difference, Gakeval says, is China’s system of governance lets it act faster. China’s growing global clout is disconcerting. Its $18.6 trillion bond market is the world’s second largest, behind the U.S., and under President Xi, it has been quick to flex its political muscle. At his party’s 100th anniversary, Xi gave a defensive and belligerent speech that Yardeni says put the world on notice, emphasizing the importance of the Chinese military and warning foreigners not to interfere in its relationship with Taiwan. “… Realizing China’s complete reunification is a historic mission and an unshakable commitment of the Communist Party of China.’’ A Cold War with the second-largest economy in the world.

I call “hogwash’’ on concerns the bond market is telling us economic trouble is brewing. If anything, the crowded and one-direction trades of early-2021 are being flushed, best evidenced by the abrupt shift in flows, Strategas Research says. It notes over the last 10 days, flows into long-bond ETFs are in the 95th percentile. On top of this, the Fed on a 3-month rolling basis has bought the entire net supply of Treasuries, a rarity even in times of QE. Meanwhile, the S&P has quietly made new highs on most days. I mentioned this on Fox’s “Mornings with Maria’’ this week, noting that mega-tech has powered an ever-narrow advance. Plus, on thin summer trading with a dormant VIX, the setup is just right for a 10% correction. “Are you suggesting investors move some cash to the sidelines,’’ Maria asked? No! There are trillions of dollars of sideline cash waiting for the pullback, a peak in earnings appears years out and market timing doesn’t work! Now, I have a little family fan club, which members tune in often to see my TV appearances. Nephew texts, “Sell in May and go away.” Did you listen to anything I was saying?! My son’s reply, “Buy in July, make an all-time high.” I’m tearing up over here.


  • A wardrobe refresh doesn’t come cheap Consumer credit jumped $35 billion in May, the biggest increase ever and nearly double market forecasts.
  • Businesses desperate for qualified workers Job openings rose to a record high of 9.21 million in May, although declines in hiring and separations indicated employers were having trouble finding workers with the required skills. Weekly continuing claims hit a new pandemic low.
  • Easy money loves company The ECB adopted its own version of inflation targeting, replacing its old inflation target of “close to, but below 2%” with a symmetric 2% inflation target with the potential to tolerate future periods in which inflation is “moderately above target.” China, concerned about its slowdown, also opening hinted at more rate cuts. So far, continued easy global money should protect the U.S. dollar.


  • Should we worry about peak growth? Though still elevated, ISM services fell more than expected in June off May’s record, suggesting supply bottlenecks remain acute amid very strong demand. Sixteen of 18 industries reported production gains. Markit’s gauge also slipped, but still reflected the third-fastest expansion in the service sector since data collection began in October 2009.
  • CEOs seem to think growth has peaked The latest reading of CEO confidence in the economy one year from now dipped to its lowest level since December 2020 on concerns about higher taxes and tougher regulations. And Investor’s Business Daily’s IBD/TIPP optimism gauge fell to its lowest since February.
  • President Biden whispered, “Pay them more” Even as the employment gap looks set to close less than two years after the Covid recession started—the quickest recovery since the early 1970s’ downturn—a near-record number of workers are quitting to find other work, lured by higher potential earnings elsewhere. This “new worker premium’’ is so great, TrendMacro says, that relatively labor-intensive, low-productivity sectors such as Leisure & Hospitality can’t compete. The sector was the hardest hit by lockdowns, representing half of the employment shortfall since February 2020’s nonfarm peak.

What else

A new take on gridlock Cornerstone Macro notes many of the most prominent younger members of Congress on both sides of the aisle are more interested in raising their profiles, especially through social media, than passing legislation. And they fund their campaigns by raising money online with a steady diet of outrage. This is helping fuel a divide as D.C. politicians devote more of their time and energy on signaling to their political base than on legislating.

No man’s land Health care stocks that traded at low valuations pre-Covid still trade at low multiples today, largely because it’s hard to grow significantly faster than the rest of the economy when you’re almost a fifth of the base. Empirical Research notes that while the extremes of the growth-value distribution have been dominant in this market, the more mundane, defensive middle—health care, staples, utilities—has been left behind. They’re caught in a no man’s land of sorts—not growing fast enough to compete with the high-flying tech stories nor cyclical enough to surf the reopening wave.

Any other boomers out there shaking their heads? Decentraland is a virtual world with land for sale. Users can buy more than one plot to build an estate, with land purchases tracked using Ethereum smart contracts and funded with the cryptocurrency Mana. Developers own the common spaces, plazas and roads of this virtual world, and landowners can build on their land and use it for revenue-generating activities. Land gains value based on where in Decentraland it’s located and how it’s developed. Some of the more popular developments: art galleries that display digital non-fungible token art.

Connect with Linda on LinkedIn 


Tags Equity . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Investing in IPOs involves special risks such as limited liquidity and increased volatility.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Conference Board surveys CEOs at major companies quarterly to gauge their confidence about the economy.

The IBD/TIPP Economic Optimism Index is a gauge of consumer and business confidence.

The Institute of Supply Management (ISM) nonmanufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Markit Services PMI is a gauge of service-sector activity in a country.

VIX: The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility.

Federated Equity Management Company of Pennsylvania