Market at record highs as August marks seventh straight monthly gain

Thoughts

• The S&P 500® Index ended the week at the 52^nd record high for the year, the most record closes through August on record. August will close with a gain of roughly 3%, the seventh-straight monthly gain. All sectors are positive year to date, led by 34% for financials and 33% for energy. Through August, the S&P 500 will have returned 21%, following returns of 18% and 31% in the previous two years. On the surface, the last three years have little in common from a fundamental perspective, but all three had accommodative central bank policy growing fiscal spending and a lack of attractive alternatives to equities.
• Equity markets continue to have tailwinds from central bank liquidity, strong economic growth, accelerating earnings expectations, aggressive share buybacks and a buy-the-dip mentality of investors. Risks from the Delta variant, the prospect for peak economic and earnings growth and elevated valuations have not derailed the bull run. The news is almost entirely nerve-racking while equity markets continue to move higher. The next challenge to the market’s resilience is the recent shift in leadership to defensive sectors, such as utilities and health care.
• The last time there was this big of a disconnect between the fundamental outlook and market behavior was January 2020. The biggest risk flag for an investor today is overconfidence.

News

• A potential fiscal cliff looms after the Supreme Court struck down a national ban on most evictions ahead of next month’s expiration of enhanced unemployment benefits. The White House has limited flexibility for unilateral action, and Congress has little appetite for additional spending. Only about 11% of the $47 billion program for rental assistance has been distributed The Philly Fed estimates that two million households behind on payments due to pandemic-related job loss as the eviction ban expires on September 30.
• Fed Chair Powell gave his highly anticipated speech to the Jackson Hole Symposium on Friday, suggesting that the Fed will begin reversing its stimulative policies later in the year, while expecting inflation pressures to fade over time. Since the July meeting, there has been “more progress in the form of a strong employment report for July, but also the further spread of the Delta variant.” Powell’s speech was viewed favorably among investors, as he stressed that a tapering of asset purchases does not suggest that rate hikes are imminent.
• The Delta variant continues to complicate return to office and school plans, with hospitalizations above 100k for the first time since January. Hospitalizations are skewed to younger individuals, with admissions of those under 50 at record levels. This is putting pressure on the FDA to authorize vaccines to those under 12, though this is unlikely before the end of the year. The Pfizer shot is currently the only one available for those 12 to 17 years old.

What to Watch

• A busy week awaits, with pending home sales on Monday, consumer confidence on Tuesday, ISM manufacturing on Wednesday, durable goods on Thursday, and the monthly payroll report and PMI data on Friday.