FINANCIAL MARKET UPDATE 7.20.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

CAN A MARKET DECLINE BE A GOOD THING?

The market has experienced some volatility over the last week, as concerns that the Delta coronavirus variant could impact economic growth have increased. The large-cap stocks of the S&P 500 have declined nearly 3% over the last three trading days. Cyclical ‘reopening’ stocks that were hit especially hard during the height of the pandemic have fared even worse, and the small-cap stocks of the Russell 2000 briefly hit correction territory (defined as a 10% decline) on Monday.

While inflation has generally been the prevailing worry in recent months, there is evidence to suggest those fears have taken a back seat. If inflation were driving the recent equity market moves, you would expect bond yields to be rising. This would likely occur to compensate investors for a fixed rate of interest that now delivers less purchasing power. Instead, the yield on the 10 Year Treasury bond has declined more than 0.20% over the last week. Such a move is more consistent with an expectation for a slower rate of growth.

Is this volatility a precursor to a larger drawdown? The answer, of course, is impossible to know in advance. The market opened higher and is rallying fairly strongly as of this writing. Perhaps the recent selloff was just a blip on the radar? Or perhaps stocks are beginning to buckle due to their lofty valuations. Only time will tell.

Something we do know is periodic volatility in the equity market is normal. The chart below illustrates the frequency of drawdowns for the S&P 500 going back to the 1940s. As you can see, a decline of -5% or more has occurred fairly regularly, about three times per year on average. Over halfway into the year, we have not had a pullback of this degree yet. Larger declines of more than -10% have occurred surprisingly frequently as well. Referred to as a ‘correction,’ they have historically happened about once a year. Finally, a decline of -20% or more has historically occurred every 6 to 7 years. Large declines of this magnitude are referred to as a ‘bear market’ and are often accompanied by a recession.

Sources: Capital Group, RIMES, Standard & Poor’s. Assumes 50% recovery of lost value. Length measures market high to market low.

The point of showing this chart is not to suggest that stocks are due for a pullback simply because we have not had one in a while. Rather, it is to remind investors that volatility is a normal and healthy feature of investing in the stock market. Selloffs can reset valuations, temper excessive optimism and speculation, and provide the market with a stable foundation for future growth. Taking this lesson to heart when times are good can give investors the strength to stay disciplined when they inevitably aren’t.

WEEK IN REVIEW

  • Earnings season got underway last week, with 8% of S&P 500 companies reporting results thus far. Year-over-year earnings growth was expected to be 63% as of June 30th. Blending the growth rate of companies that have reported with the estimate for companies that have not yet reported, estimated earnings growth has increased to 69.3%.
  • This week will be fairly quiet on the economic data front. On Thursday, we will get jobless claims and the Index of Leading Economic Indicators. On Friday, we will get a flash reading of manufacturing and services sector activity. Last week initial jobless claims sank to a post-pandemic low of 360,000. Retail sales, meanwhile, surprised to the upside, increasing by 0.6% MoM, vs. expectations of a -0.4% decline.
  • Bitcoin has spent most of today trading below $30,000, after falling over 50% from its mid-April peak.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • It’s Official: The Covid Recession Lasted Just Two Months, the Shortest in U.S. History (CNBC)
  • Used Car Supply is Improving (Axios)
  • Meme Stocks Mired in Longest Losing Run Since Frenzy Began (Bloomberg)

Investing

  • 90% of Personal Finance is Just Spend Less than You make, Diversify, and be Patient (Morgan Housel)
  • How the Stock Market Works (Ben Carlson)
  • The 7 Best Investing Podcasts for 2021 for Serious Investors (Investor Place)

Other

  • The Rose Bowl Throws a Wrench in College Football’s Playoff Expansion Plan (SI)
  • An ‘Airbnb for Pools’ Is Making a Splash This Summer (WSJ)
  • Jeff Bezos Reaches Space on Blue Origin’s First Crewed Launch (CNBC)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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