What Correction?

Stocks opened sharply higher this morning despite some weaker than expected economic data. At the moment, the Dow is up 270 points and the S&P 500 is up 1%. A number of sectors are up more than 1% in early trading: energy +3.6%; communications +1.6%; consumer discretionary +1.3%; technology +1.1%; financials & industrials +1%. The VIX fear gauge fell back to 17 after the FDA finalized full approval of Pfizer’s Covid-19 vaccine, which had previously been under an emergency use authorization. With this approval it may be easier for businesses to mandate vaccinations for employees. Commodities are trading mostly higher as well. Copper surged 2.7%, WTI crude oil bounced back to $65.50/barrel and gold is up 1.2%. The bond market is mixed, shifting back toward risk-on. That is, safe-haven Treasuries are down in price whereas riskier junk bonds are catching a modest bid.

Earnings season is nearly complete. That is, about 475 of the S&P 500 companies have reported last quarter’s results. More than 80% of them exceeded Wall Street analysts’ expectations for sales and earnings. In aggregate, they reported year-over-year sales growth of about 25% and earnings growth of roughly 90%. This past quarter appears to have been the peak of the Covid rebound and growth should moderate to more sustainable levels in coming quarters. I thought I’d highlight some comments from a few business leaders below:

3M (MMM). “There’s a lot of demand, there’s not enough supply based on all the V-shape recovery with the congestion in the ports, etc. And until that stabilizes itself out, I think we are going to continue to see inflation.”

Mastercard (MA). “…quarter 2 net revenues are now 10% over 2019 levels.”

Southern Company (SO). “…customer growth remains robust with new connects significantly outpacing our expectations across the electric utilities, reflecting construction new homes, as well as new commercial businesses…”

Procter & Gamble (PG). “Input costs have risen sharply. Current spot prices for materials such as resins, chemicals and other ingredients are up anywhere from 30% to 200% versus April 2020”

S&P Global (SPGI). “Risks are shifting from the pandemic to the pace of the recovery. In particular, rising inflation in the U.S. and some emerging markets points to a possible bumpy transition from the ultra-low rates and easy financing conditions to the post-COVID-19 steady state, and with economies on the mend, policy normalization and sustainability are coming into sharper focus.”

Walt Disney (DIS). “In terms of the impact of the Delta variant, we see strong demand for our parks continuing. And the primary noise that we’re seeing right now are really around group or convention cancellations. In other words, large groups that are coming in relatively short-term. But on the whole, we see really strong demand for our parks.”

IHS Markit, a private research firm, says its US business activity surveys deteriorated more than expected this month. Markit’s manufacturing index fell to 61.2 from 63.4 and its services index fell to 55.2 from 59.9. Bloomberg attributes the downshift to ongoing “materials shortages, a lack of labor and an upswing in coronavirus infections.” As a reminder, business activity surveys generally use a scale whereby readings below 50 indicate contracting business activity and those above 50 indicate expanding activity. So clearly the backdrop is still very positive. Executives generally report strong demand for both goods and services, but they’re having trouble meeting that demand. Supplier lead times are the longest in 14 years. Hiring activity is at its slowest pace in a year. These disruptions are believed to be temporary but no one knows whether that means three months or 18 months.

Existing home sales ticked up for the second straight month in July to an annualized rate of 6 million transactions. And believe it or not, for-sale inventory actually improved. There were 1.32 million homes for sales last month, the most since October. Looking back to 2020, housing demand exploded to levels not seen since 2006 but since then has fallen back to earth somewhat. While mortgage rates remain very low, affordability levels are perhaps even lower. The median US home price rose a ridiculous 17.8% in July from year-ago levels! What we need is some moderation in housing activity and the chief economist of the Nat’l Association of Realtors thinks we’ll get it. “The housing sector appears to be settling down.”