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Equity markets continue to feel the wrath of the tapering and Delta variant concerns. The state of the US monetary policy and the global growth engine appears to have soured.

The Initial Jobless Claims had dropped to 348,000. This is a new low, which is much better than what economists had expected. Before the data was announced, most indices were red. Nonetheless, it appeared that concerns on the economy continued to linger as around 56% of the S&P 500 stocks retraced during the trading session. Value stocks that were more sensitive to the economic demand had a big hit.

Russell 2000, which is Pika World favourite, hit the most, down by 1.25%, as they are most affected by any signs of slowing growth.

Signs of Exhaustion and New Reality

The revelation of FOMC July’s meeting added to the broader worries on economic growth, and in the face of the Delta variant, investors’ sentiment is dampened. As a result, the buy the dip paused as market participants anticipated lower liquidity in the market than expected when the massive monthly bond purchase slowed down.

Caution appears as the market hates the uncertainty on the timing and the pace of tapering coupled with weekly delta cases growing worldwide. While a slight rebound can be seen in the market, this is mainly because most investors had anticipated some form of signal to a change in policy and thus were positioning for some dip.

Consumers changing Behavior

On uncertainty, it is debatable if the current high inflation is starting to erode consumer demand. For one, the safety restriction globally continued to limit supplies, increase producers’ inout cost, and put upward pressure on selling price. This is seen in the recent PPI data.

Then, the weaker retail sales data last week almost seal the softer consumption sentiments, though households may have switched to other forms of consumption, and more data will be needed to pan out the narrative.

Trajectory and Expectation

In the light of the weaker equity sentiment, Pika World has for the past 2 weeks encouraged the rotation to defensive sectors of the economy, which has deterred considerable deterioration of portfolio assets. As a result, we continue to be positive on US economic health while acknowledging a weaker sentiment is here to stay. Once the certainty of tapering is resolved, the sky might be blue once again.

We continue our mild accumulation of strong core stocks, such as Microsoft, which has some tailwinds, as discussed in our Pika World Updates despite a less rosy market. The higher volatility is not uncommon since we have expected boredom to disappear and more significant movement during Aug-Oct seasonally weak market season coupled with the summer season where investors typically see lighter trading activity.

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