All sectors followed different directions this past week as investors tried to measure COVID-related concerns amid the confusing headlines. The focus was on the European outbreaks caused by the Delta variant of the virus, and while the latest reports confirm that the current vaccines are highly effective against the strain, the surging number of cases is still a major threat to the global economy. Treasury yields turned lower as inflation fears continue to be minimized by the Fed and more and more investors are becoming bullish on low interest rates and strong growth to support stocks into the end of the year.
The consumer confidence number hit a new pandemic era high, pending home sales surged to a fresh 16-year high, job cuts plunged to a multi-decade low, non-farm payrolls jumped by 862,000, and new jobless claims also dropped below 400,000 as the job market is finally showing signs of strength. Even though the Chicago PMI and the ISM manufacturing PMI both remained above 60, suggesting strong growth in the sector, they both missed expectations in relation to construction spending and total vehicle sales.
The Dow managed to hold up above its 50-day moving average. The S&P 500, the Dow, and the Nasdaq are still all above their short-term indicators, and the benchmarks are also well above their 200-day moving averages. Small-caps showed weakness for the better part of the week, but the Russell 2000 still closed above both of its moving averages despite its weekly loss. The Volatility Index (VIX) chopped around in a relatively narrow range, and while the fear gauge hit a marginal new pandemic low, it showed signs of accumulation from funds and banks near the 15 level.
The holiday-shortened week will be packed with key economic releases and central bank action, so while trading volume usually drops following Independence Day, we could still be in for an active week of trading on Wall Street. The ISM services PMI will highlight Tuesday’s session, the JOLTS job openings estimate and the FOMC meeting minutes will be in focus on Wednesday, the European Central Bank’s (ECB) meeting minutes will be out on Thursday, and the Fed’s monetary policy report and the G20 summit could impact markets on Friday. We expect some event this week to trigger a sharp reversal in equities. The first wave of selling in July is expected to be bought up by conditioned dip-buyers from the past 16 month advance. The rebound should fall short of previous highs and roll over to confirm a more serious correction into August rather than the brief consolidations investors have witnessed during the past year.