August 17, 2021

It’s Not Just Afghanistan

The markets have started the week with modest selling that at first resulted in real investors “buying on the dip”, just as they said they would. Today on the other side of the table the Algochums have found a reason to see current events, Covid variants, the Fed becoming more hawkish and Washington looking like they’re out of control of the country. The trouble is, in my opinion, I don’t think any of those matters, and as the broad indexes show expected weakness the response is as much about clear moderation in the economy, the Delta variant is winning for now, and the Fed can be hawkish and patient. Also, failed efforts in foreign affairs are nothing new to Washington and with nothing more than the blame game on show, the connection on the economy is lost in translation. Here’s what I see.

The Markets

The correction taking place in the broad indexes over the past two days is not unexpected from a technical standpoint.  Overall momentum of many of the most vigorous stocks had already seen some moderation. The turnaround of tech stocks that struggled in the spring is probably ready to slow down but going into the fall the holiday season will speed up along with consumer activity, and business dependent on technology. In my opinion, all will benefit as we witness more global activity as Japan, Europe and the UK officially reopen. 

The Economy

Industrial production is up .9% in July and Retail Sales is down 1.1% in July. This makes sense since the industrial sector is short on materials that indicate genuine activity that has been consistent for over a year, in part in anticipation of a legislated infrastructure deal. Given the decline in manufacturing activity in June, July represents exactly the reversal of that moderation I’ve been writing about. The same goes for Retail Sales, as it should come to no one’s surprise that the consumer has stepped back a touch not only due to the concerns around the potential severity of the Delta variant, but the clear signs of inflation in food and other consumer items can also keep people thinking twice about going out to shop. But as mentioned before, the consumer currently makes up over 50% of GDP (Gross Domestic Product) and confidence to spend can turn on proverbial dime. That may be the waning of the variant, the passing of FDA approved booster shots, and maybe even a slowdown in recognizable inflation.

It's worth remembering that in the recent employment data, both the Employment Cost Index (ECI) which track wages and salaries was up .7% for the July and 3.2% for the 12 month period. This means more cash for the consumer to spend on the economy, and no consumer is better at that than the American consumer.

External Events

Although the ongoing narratives continue with all of the issues facing the economy and capital markets, the same narrative has been disrupted by the events that took place in Afghanistan. Not because of anything specific about the event, but that the event has taken the attention away from all of the chatter surrounding the colliding infrastructure deals, and even to some extent less media conversation on the Delta variant. I think that’s especially important, because the economic stats referred to above suggest that the public knows how to take care of themselves and continued lecturing from the “experts” may be losing some momentum.  All this is probably too early to see as a true benefit, but as I’ve felt from the beginning of the summer, the challenges facing the markets needed to see follow through with some results. In my opinion, that hasn’t happened yet, but external events are beginning to set the strategy in motion that favors the outcome. We can wait.


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