The Semiconductor sector is doing about what we predicted and has now had a solid breakout. The last 2 quarters for the year should be good for this sector as chip manufacturers work hard to catch up with demand. Expect more of a choppy market for August, as July and August are historically very choppy and usually do not provide for a lot of gains. Covid is having some effect on the markets, but it is our opinion that it is likely just because it is this time of year, and the markets are overbought. 

The ISM Services PMI shot up 4.0 points in July to 64.1, a record high, and above the consensus of 60.8. It shows a significant surge in services activity at the start of Q3, in contrast to a softer pace of growth in the manufacturing sector. The combined latest readings of the ISM Services and Manufacturing PMIs correspond to 4.4% real GDP growth annually. It suggests that while the expansion has lost some momentum in early Q3, growth is quite robust and there is no risk of recession on the near-term horizon.

Most individual activity indexes posted strong gains last month. Business activity rebounded 6.6 points to 67.0, the third highest reading ever. New orders and employment growth also picked up. Similar to manufacturing, services continued to be plagued by shortages and bottlenecks. The supplier deliveries index climbed 3.5 points to 72.0, second only to the reading from April 2020 when the economy was in the midst of a pandemic lockdown. Because of these nearly unprecedented vendor delays, firms dipped again into their inventories, which fell further into contraction territory. Inventory sentiment fell to another record low, which is as much a sign of strong future demand as it is a sign of firms’ trepidations about meeting that demand. Order backlogs accumulated at a near-record pace, highlighting mounting capacity constraints, despite the uptick in the hiring pace. Import order growth eased, while export order growth rebounded to the fastest rate since May 2007.

ADP private payrolls increased 330,000 in July, the smallest gain in five months, and well below the consensus of 628,000. The three-month average dipped to its lowest level since April, as job creation has lost momentum over the past several months. Since ADP payrolls are still 6.5 million short of their pre-recession peak, the current pace of job growth implies that the peak will not be recovered until June 2022. This is in contrast to real GDP, which surpassed its pre-recession high in Q2. ADP noted that “bottlenecks in hiring continue to hold back stronger gains.” While some of the factors weighing on labor participation, such as childcare options and unemployment benefits, should ease in the coming months, the recent spike in COVID cases presents a near-term headwind. 

The markets are trading pretty much as we anticipated. The HCM-BuyLine® is positive and is still very strong, so any pullback should be bought. July and August are historically slow months and usually produce nothing but volatility; this seems to be holding true in 2021. We do expect the market to be higher by year-end. 

Like we stated in the past few Wealth Watch updates, AMZN has broken out of a 9-month base, and we expect that equity to move higher in the near-term. We are also bullish on SOXX, which is the ETF that tracks the semiconductor index. Chips have been in short supply and have held back some industries such as auto from being able to manufacture as fast as they would like. This is starting to ease up a bit, and we expect that by year-end it will not be nearly the problem it is now. 

To add to our outlook on chips, Qualcomm (QCOM), the world’s largest smartphone chipmaker, delivered a bullish quarterly forecast helped by the growth of 5G networks and consumer demand for new devices. On Wednesday, the company said earnings will be $2.15 to $2.35 per share for the period ending in September, which is well ahead of the average projection of $2.07. Revenue will be $8.4 billion to $9.2 billion, compared with an estimate of $8.5 billion.

Private sector gross job gains fell by 2.0 million in Q4 2020 to 8.8 million, which was still the second highest level since Q1 2000. Gross job losses slipped by 188,000 to 6.7 million. As a result, there were 2.0 million net job gains at the end of last year, the second most since data started in 1992. It shows that employment dynamics continued to normalize, following the pandemic shutdown and massive job loss in the first half of last year.

All 13 industries posted net job gains, but most were in services. Nearly 2/3 of all net job gains were in professional and business services, transportation and warehousing, and education and health care. 

Bond yields were falling on Monday’s equity selloff, with the selloff helping to push a flight to the relative safety of bonds. The 10-Year Treasury yield fell below its 200-day moving average to the lowest level since February, and that is hurting financial stocks. The Financial Sector SPDR (XLF) is threatening its June low. Furthermore, the Energy SPDR (XLE) fell to a 3-month low after a big drop in the price of oil, making energy shares the day’s weakest sector. 

Sufficient panic shown in VIX term structure is associated with market bottoms. July is historically very choppy, and despite the HCM-BuyLine® being positive, being patient for a few days or a week or two during this time of chop could be wise. 

The global story of COVID-19 is the Delta variant. Over the past 8 weeks, the story of COVID-19 has become almost singularly about the Delta variant.  We feel this is more media driven news than a real cause of great concern.

Retail sales rebounded 0.6% in June, contrary to the consensus of -0.4%. It was the third increase in the past four months and followed a downwardly revised -1.7% in May. The surprise increase last month was due in large part to higher consumer prices, as retail sales are reported in nominal terms. Discounting by the CPI for consumer commodities, which was up 1.7% in June, suggests that real retail sales actually declined by about 1.0% for the month.

Nevertheless, the surprise increase in retail sales suggests that companies’ revenues are growing. Most major categories posted solid gains, led by miscellaneous stores (+3.4%) and electronics and appliance sales (+3.3%). Other notables included: apparel (+2.6%), gas station sales (+2.5%), and food services (+2.3%). Those were partly offset by declines in vehicles (-2.0%), furniture (-3.6%), building materials (-1.6%), and sporting goods (-1.7%). Excluding vehicles, retail sales increased 1.3%, above the consensus of 0.5%.