Remaining Resilient in the Face of Significant Adversity: Market Commentary from Cabana’s CEO – August 17, 2021

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The major US equity market indices have remained resilient in the face of significant adversity, which is a huge understatement. Despite the reemergence of COVID, masks and all-time highs in hospitalizations, buyers continue to step in on each dip. We received an absolutely horrible consumer confidence number on Friday, one of the biggest month-over-month drops in history and the lowest reading in a decade. Monday’s markets opened down and I was watching to see if we would finally see the breakdown brewing underneath the hood for the past six weeks. The bond markets (yield) already broke as evidenced by a swift 50bp drop in rates on the benchmark 10 year. Well, no big break occurred, and buyers stepped in pushing indices all the way back into positive territory by the close. Small and mid-caps continue to lag and finished in the red. The consumer discretionary sector ended down less than 1%. 

Today markets opened down again across the board. So far buyers have not shown up, although the day is not over at the time of this writing. The consumer discretionary sector is down today more than 2% (as of Noon) and leading the fall. So, where do we go from here? That is always the question in this business and the truth is NOBODY knows for sure. What we can do is back up and look at things objectively.

  1. We are long overdue for a correction. We have not seen a pullback of more than 5% in nine months. 
  2. The Delta variant of COVID has been a wakeup call for all of us (no pun intended if you read last week’s commentary). It appears this virus will continue to be a part of all our lives going forward. Like other virus threats, we will just have to deal with it. The CDC recommends getting vaccinated or risk getting sick. Like other vaccinations, people will make their own choices. I suspect in the short term we will see increased pressure, formal and otherwise, on people to get vaccinated. Regardless, we are going to have to get the flames put out to some degree, no matter what. 
  3. Earnings are strong. We are wrapping up second quarter earnings and 87% of companies have beaten estimates. The average margin was 13% and that is very good.
  4. The historically low consumer confidence number is evidence of capitulation and may actually indicate a bottom. In the past, any reading below 74 has been a buying opportunity. Friday’s number was 70. The difference here may be that markets are at all-time highs and there has not really been a commensurate bottom in stocks… at least not yet. Also, we are in unique times. COVID just makes everything harder, even thinking about data.

At the end of the day, it seems to me a mixed bag. Earnings drive stocks and based on that certainty alone we are in a new cyclical bull market. We are likely still in the early innings, but it feels a lot like we just hit a grounder back to the pitcher with two outs. We may need to head back to the dugout and regroup before another at-bat. 

Disclaimers

February 23, 2021

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