Stock Prices Reflecting A Resumption In Earnings Growth

One factor about the equity market is its movements are often influenced by expectations. Economic news that is reported better than those expectations can impact broad equity market prices and earnings that beat expectations are an important variable impacting the price of stocks too. For the broader marker, in this case the S&P 500 Index, earnings expectations for 2021 appear to have bottomed as the hook at the end of the red line on the below chart shows. Also important is earnings growth is expected to resume with an increase of 26% in 2021 versus 2020 and a further 16% increase for 2022 versus 2021.

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So Far Not A Year For The Dogs Of The Dow

This year has not been a good one for the Dogs of the Dow strategy. A number of reasons can be cited, like energy sector weakness and both Chevron (CVX) and Exxon Mobil (XOM) included in the strategy this year or Cisco System (CSCO) and IBM a part of the Dow Dog portfolio and not Apple (AAPL). In a year where the FAANG + Microsoft (MSFT) portfolio is so dominant from a return perspective, it is clear from hindsight why the Dow Dogs are lagging.

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A Healing Job Market

With over 15 million individuals unemployed based on Thursday's jobs report and an additional 10.7 million individuals receiving Pandemic Unemployment Assistance, labor market improvement can not happen fast enough. However, employment related reports this past week indicate the job market is improving. Initial jobless claims for the week ending August 7 were reported at 963,000, a far cry lower than the nearly 7 million claims filed at the peak of the pandemic shutdown in March/April. Although last week's claims level is too high, they are declining.

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Economic Tailwind Contributing To Favorable Equity Market

In a number of my recent blog posts I have written about the "V-shaped" recovery unfolding in both the equity market and the economy. Economic data reported over the last two weeks continues to support this V-shaped narrative. Much of the recent economic releases are positive and the data, when plotted on a chart, trace out a V-shaped pattern as well.

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VIX/VXV Level Warrants Investor Attention

July's return for the S&P 500 Index of 5.64% pushed the index into positive territory for the year, returning 2.38% year to date. More impressive is the S&P 500's return since the March 23 low at +46.2%. It is hard not to agree there appears to be an upward bid to the equity market in spite of concerns around the virus induced weakness in some of the economic data, especially in the jobs/employment data. In my last post I wrote about the AAII Sentiment Survey and concluded the market seems to be climbing a wall of worry given the low level of bullishness being expressed by individual investors.

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