With July in the rearview mirror, we continue a sixth-month positive rally in the stock market during 2021. The S&P500, DowJones and Nasdaq indexes managed to grow +2.27%, +1.25% and +1.16% respectively during the last month.
Second quarter reporting season of 2021 started two weeks ago. As of today, the results have been excellent, 59% of the companies that make up the S&P500 have reported and 88% have exceeded Wall Street expectations. So far, a good recovery indicator.
An anecdotal case was Amazon. After being one of the companies favored by the pandemic due to the "excess demand" of sales throughout 2020 and early 2021, it had a wake-up call, falling -7.8% after reporting their results last week. The stock behavior was, in part, caused by people starting to get out of their homes while moderating the use of the online service. This "moderation" has caused the company's growth expectations to be less than Wall Street wanted. Despite this, Amazon's revenues grew - during the last quarter - an impressive +27% (113.1 billion US dollars). Still exceptional numbers.
In general, investors have two major concerns on the horizon: Inflation and an economic slowdown due to the delta variant of Covid-19 (that has shown a rise in recent weeks here in the United States). In the case of inflation, we have seen a strong increase versus the previous year, but, the great uncertainty continues to be whether it is transitory or not. I am of the opinion that we are going to be in the middle, where inflation is growing but still manageable. Looking forward, it will depend on the growth rate of the economy and the changes in monetary policy dictated by the Federal Reserve. As of an economic slowdown, we are monitoring an increase in the cases of Covid-19, any potential lockdowns, and the 10-year reference interest rate, which is showing a classic “fear of the future” behavior falling to 1.18% versus a 1.7% in March.
A solid economic recovery is based on the premise of minimizing the impact of the pandemic and -for investors- it is very different to face a pandemic with a vaccine than without it. The vaccination process is key in this dynamic, the greater the number of people vaccinated, the lower their ability of the illness to spread and therefore the recovery process continues.
Predicting the future is nearly impossible but we know that the markets will not always keep the positive trend, so we have to be cautious. Protecting against inflation begins with a review of your portfolio objectives and investing in the appropriate coverages. For example, through Treasury Inflation Protected Securities (TIPS), and/or purchase of gold / shares of commodities, among other options. It's also wise to guard against a potential interest rate hike by reviewing your fixed income investments and the "duration" of your portfolio. ("Duration" in portfolio management is a risk indicator, which evaluates the effect on value that a portfolio can have when the interest rate rises)
As of today, a barrel of crude is trading at $70.77/barrel; 10-year Treasury bond yield falls to 1.18%; gold at $ 1,818.00 per ounce, the Euro trading at a rate of 1,187 euros / USD and finally, bitcoin falling at a rate of $ 39,806.55 / bitcoin.
Hope you have a wonderful week and please, don't hesitate to reach out if you have any questions or concerns.
Eduardo Lucca Bianchi