Summer Uncertainty

There is a lot to digest in the headlines these days from politics to central banks to inflation and now we are back to the coronavirus and its new delta variant. It all matters to the financial markets but what matters most is that global trade continues to recover and companies are reporting good revenue growth and margins. I doubt we will see a shut-down like last year given that vaccinations are providing some protection and that allows governments to keep their economies open and running.

Despite the headline uncertainty, the stock market has been holding up fine and grinding higher which is true of most years in the summer weeks. There is not much on the calendar until the Jackson Hole conference (8/26) where Fed Governors may drop hints of potential policy changes. For now, the dip that ended on July 19th has bounced, consolidated and is now moving up to the next point of resistance at 4485. Slightly overbought now so a small degree pullback may be in store early next week but this trend should continue higher.

Chart of the S&P 500 by Kisco Capital.

Volatility also continues to push lower so that is another sign the market is not setting itself up for a large pullback. For reference, you can divide the VIX Index by 16 to get the implied one-day move of the S&P 500. For the close on Friday, that would be: 15.45/16 = 0.096%. Not a very concerning number right now.

VIX Volatility Index

For now, we are in summer trading mode where markets grind higher on low volatility which is counterintuitive given all that is happening but the bottom line is that if economies can stay open then the recovery should continue into next year.

Chart of the Week!

The global supply chain was dealt another shock as China’s largest port (Ningbo-Zhoushan) was partially shut down due to a new COVID-19 outbreak. That will have a compounding impact on major ports throughout Asia and around the world, leading to more delays and higher prices for imports. The worldwide waterways are pretty congested right now – here is a live map from (WSJ)

Economic & Central Banking Snippets 

  • The Cass Freight Index for July was released Thursday and showed overland shipping volumes in North America returning to pre-pandemic levels at elevated shipping costs. Freight shipments were just 0.5% higher than in July 2019, but 15.6% higher than July 2020. 
Cass Shipments Index
  • New applications for jobless benefits declined for the third straight week, showing the labor market continues to heal despite worries about the Delta variant.
Jobless Claims
  • The so-called core price index, which excludes the the most volatile categories of food and energy, increased 4.3% from a year before, down from a 4.5% annual increase in June. Month to month, the core CPI rose 0.3%, also down sharply from the 0.8% average increase in the previous three months. (WSJ)
CPI for July 2021
  • U.S. producer prices jumped in July, suggesting strong demand and supply chain bottlenecks are pushing costs higher. The producer-price index (PPI) for final demand, a measure of the prices businesses receive for their goods and services, increased 7.8% from a year earlier, the largest advance since the 12-month data were first calculated in November 2010. 
Annual Change in PPI
S&P 500 Operating Earnings
  • Analysts are projecting that earnings in the S&P 500 grew 90% in Q2 from a year earlier, according to FactSet. Rising share prices have kept stock valuations elevated as the S&P 500 is now trading at 21x projected earnings over the next year which is above the five-year average of 18.5x.

  • With 83% of the market value of the S&P 500 having reported, the operating margin for the index in the second quarter is expected to come in at 13%. The results show that big U.S. companies have succeeded in growing their sales while managing their costs. (WSJ)
  • Vaccination is increasingly a requirement to be hired, as employers ranging from accounting and software firms to schools and restaurants are asking applicants to be inoculated against Covid-19
Share of the population fully vaccinated.
Paul J. McCarthy III

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.