Optimism around GDP growth, employment and earnings has, for now, outweighed worries related to COVID-19 variants.
As the major domestic equity indices continued to mark new highs through July, they provided an example of how dueling narratives can both be true while the forward-looking market produces a clearly positive result. In this case, optimism bolstered by a broad selection of economic data and sentiment – gross domestic product (GDP) growth, employment, earnings and reduced inflationary fears among them – has managed to, for now, contain COVID-19 delta variant worries.
The S&P 500 and NASDAQ both set seven all-time highs in July, while the Dow Jones Industrial Average recorded five. Under those glossy headline numbers, however, lies a more complex situation with wide disparities in performance between firm sizes, sectors, growth versus value, and commodities. For example:
- The S&P 500, reflecting large-cap firms, went up 2.38% in July. The Russell 2000 with its small-cap firms ended the month down 3.61%.
- The healthcare and real estate sectors were July’s best performers, while energy and financials were its worst.
- The S&P Growth Index rose 3.79%. The S&P Value Index rose only 0.79%.
- Gold rallied, gaining 2.6% while oil was up slightly with a 0.7% gain.
“Part of this performance dichotomy may be related to concerns over the spread of the COVID-19 delta variant and its potential for slowing the economy,” said Raymond James Chief Investment Officer Larry Adam. “However, our belief is that economic growth will remain strong as widespread lockdowns are unlikely to reoccur.”
At the end of the month, the U.S. Department of Commerce reported GDP growth at a 6.5% annual rate in the second quarter, which follows 6.3% growth in the first. However, even this considerable rate understates the strength of the economy in the first half of the year as consumer spending and business investments have surged.
“The pace of growth is expected to slow in the second half of the year but should remain strong,” said Chief Economist Scott Brown.