Economy on track, corrections roll through the market

Stocks opened mixed this morning following a drop of 1% in yesterday’s session. Since we haven’t seen a meaningful stock market correction in nearly a year, traders and investors alike are sitting up and taking notice. At the moment, the Dow is flat and the S&P 500 is up .3%. Energy & materials sectors are down .8% or more in early trading. Tech, communications and healthcare are holding onto gains. Commodities are suffering today, with WTI crude oil down 4% to $62.80/barrel and copper down another 2%. The bond market is mixed in today’s trade. Investment grade corporates and safe-haven Treasuries are catching a bid, while junk bonds are fading. Junk bonds tend to do well as economic growth is accelerating. After a monster rally through the winter, they look expensive and have traded flat.

We’re seeing rolling corrections among the various market sectors. For example, energy soared 100% from November to June, but has since fallen 19%. Industrials surged 40% from November through April but have bene flat since then. Technology struggled this spring but found its footing over the summer. All of this is completely normal. We’ve passed the first phase of this economic & stock market recovery in which a rising tide floats all boats. Going forward, we’ll see more dispersion between sectors and individual stocks.

Yesterday the Federal Reserve published minutes from its July policy meeting, in which it debated reducing monetary stimulus. Specifically, periodic bond-buying, aimed at keeping interest rates low, may be curtailed later this year. The Fed’s key policy-making committee is a collection of Fed bank governors, among whom there is an “emerging consensus to begin scaling back” according to the Wall Street Journal. This would be a first step toward eventually raising interest rates some time next year. I should point out that this is a bullish signal, suggesting the Fed is very confident in this economic recovery, that inflation will trend above 2% and we will soon be back to full employment. There is, however, a bearish way to interpret the Fed minutes. What if the Fed is simply reacting to the fact that inflation is trending hotter than expected and they’re worried it could get out of hand? This debate will play out in capital markets over the next several months. But regardless of the market’s interpretation (bullish, bearish), removal of stimulus must eventually happen because the crisis is past.

New filings for unemployment insurance benefits have fallen for a fourth consecutive week. Bloomberg economist Eliza Winger says this is evidence that the “labor market is evolving in a manner consistent with” the Fed’s outlook, and supports a tapering of stimulus. The rise of Covid’s delta variant have not resulted in layoffs.

Cisco Systems (CSCO) reported quarterly results slightly better than Well Street projections. The stock is up nearly 3% today. Revenue grew 8% form year-ago levels and adjusted profits rose 5%. That last figure doesn’t sound great, but it is the high end of what the company has been able to achieve over the last seven quarters. Unfortunately, profit margins declined slightly due to supply chain issues, and those disruptions are expected to persist over the next couple of quarters. Consequently, margins will continue to slide. Despite this headwind, management believes it can drive 5-7% revenue growth over the next 12 months compared with Wall Street’s consensus projection of 4%.