Supply Constraints Impact Market Performance

Major stock market averages opened slightly lower this morning. At the moment, the Dow is down 78 points, and the S&P 500 is down .2%. Real estate, utilities and consumer staples sectors are down at least .7% in early trading. Consumer discretionary and communications sectors, however, are bucking the trend and holding onto gains. Commodities are broadly lower. WTI crude oil has fallen to $67/barrel from $75/barrel this month. Copper is down 8% this month. Bonds are widely unchanged today. The Federal Reserve is due to release minutes from its last policy meeting, and traders expect them to reveal an increasingly hawkish Fed. That is, we may hear about the Fed’s intention to begin tapering its bond-buying program later this year. All else equal, that could mean higher interest rates. I doubt it.

Economic growth, which soared following the rebound from Covid-induced recession, is now moderating a bit. Retail sales fell back 1% in July, disappointing economists’ forecasts. The knee-jerk reaction to this story was to assume the Delta Variant impacted consumer sentiment and shopping habits. But it’s not that simple. One of the biggest areas of concern was a 3.9% drop in auto sales, but that’s largely due to supply constraints that will eventually work themselves out. Online sales fell 3.1% largely due to Amazon’s Prime Day, which pulled forward demand into June. So the easiest conclusion—that Delta is driving consumers to ground—is probably not the right one. As evidence, restaurant sales surged 1.7% and that certainly doesn’t speak to pandemic fear. We are seeing a demand shift away from goods and toward services, and perhaps that’s the only clear takeaway from this report.

US housing starts—groundbreaking on new developments—fell 7% in July from prior month levels. Anecdotally, we understand labor and materials supply constraints have hampered the homebuilders. But some economists believe demand for homes has peaked for the cycle. Obviously, affordability is very low, as is the supply of homes for sale. These factors could continue to restrain activity. According to a University of Michigan survey, 69% of consumers think this is a bad time to buy a home. And yet, I believe we can still say there is a structural shortage of housing in this country due to underbuilding in the decade following the Housing Crisis. This factor makes it unlikely that we’ll see a significant correction in home prices in the near term.

Home Depot (HD) reported quarterly results yesterday and the stock fell 4%. Sales during the three months ended July rose 8% from year-ago levels to $41 billion—a new record. Profits grew 13%. Same-store sales—a measure of in-store results compared with a year ago—rose 4.5% vs. Wall Street expectations for 5.6%. Management said the professional contractor business remains very strong but do-it-yourself was a bit weaker. Apparently, consumers are prioritizing spending on entertainment and travel rather than home renovation.

Target (TGT) narrowly beat expectations when it reported 9% sales growth and 8% profit growth during the three months ended July. Customer traffic in stores rose 13%. These metrics are healthy, but growth is clearly moderating from the post-Covid boom. Business is returning to normal; no one is hoarding toilet paper and cleaning supplies, and the post-vaccine surge of pent-up demand is waning. But the CEO characterized consumers as “resilient” and “optimistic.” Management says it can maintain high single digit precent sales growth in the second half of 2021. CNBC’s Jim Cramer concludes, “Can we just come to the conclusion that retail is pretty good?”

You may remember that in July Pfizer (PFE) announced its vaccine efficacy tends to wane over time and said a booster shot will be needed later this year. The company has developed a booster, which is expected to receive FDA approval for broad use very soon. The White House immediately insisted a booster isn’t currently necessary. In a joint statement, the CDC and FDA also said fully vaccinated people do not need a booster at this time. Well, today the Wall Street Journal reports the Biden Administration “called for a third Covid-19 shot starting in the fall for Americans who were fully vaccinated with the two-shot regimen…” So now that we’re on the same page, th3e booster will likely become available at the end of September.