If you’ve been feeling a little whipsawed by the market in July, you are not alone! After all of the broader indices sold off more than 1% yesterday, the S&P 500, Dow and NASDAQ rebounded more than 1% higher today.
So, what triggered yesterday’s selling?
Before I answer that, let me start by saying that the stock market actually started losing its mojo last week. Institutional buying pressure disappeared following last week’s disappointing inflation data. The Labor Department reported that the Consumer Price Index (CPI) jumped 0.9% in June, or the largest monthly increase since August 2008. In the past 12 months, the CPI has surged 5.4%, which is the fastest annual pace in nearly 30 years. Energy, gasoline and food prices all increased significantly in June, but the biggest increase was for used vehicles, which were up 10.5% last month.
The Labor Department also revealed that the Producer Price Index (PPI) climbed 1% in June, and it is now up a whopping 7.3% in the past 12 months. Approximately 60% of the PPI was due to higher services costs that tend not to retrace. In other words, inflation is alive and increasing, and the latest round of inflation may now be permanent.
Small-cap stocks were unusually weak, with the Russell 2000 slipping 5.1%, as the FAANG stocks — Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG, NASDAQ:GOOGL) — became an oasis again. So, there was a big of divergence in concentration and leadership.
Now, the main catalyst behind yesterday’s selling was over the Covid-19 delta variant. Interestingly, most value stocks were pummeled in Monday’s selloff, as fears of the Covid-19 delta variant spreading hit the travel and leisure industry. The U.S. Global Jets ETF (NYSEARCA:JETS), which tracks the global airline industry, fell 4%.
The paranoia is now so bad that Toyota (NYSE:TM) doesn’t want to be associated with the Tokyo Olympics. Toyota is a major sponsor of the Olympics, but it’s decided to remove all of its Olympic-related ads. Currently, there’s a big debate in Japan over whether the Olympics should be held this year and how to go about hosting the event safely.
But the reality is that the U.S. is among the most vaccinated in the world. So, the world might be worried, but the delta variant shouldn’t impact us as much. So, when we see this kind of crazy trading action, it’s important to remember that Wall Street is a manic crowd and tends to react first and think later.
Think First and Then React
But when you do take a moment to step back and think about it, there’s actually a lot to be excited about right now. First, we have the second-quarter earnings season. The fact of the matter is that the second-quarter earnings announcement season will be spectacular and another record for many S&P 500 companies. FactSet is currently projecting that the S&P 500 will achieve 69.3% average annual earnings growth, up from estimates for 63.3% average annual earnings growth only a month ago. So, I expect wave-after-wave of positive results to dropkick and drive fundamentally superior stocks higher.
Second, we remain in a low interest rate environment. The 10-year Treasury cracked 1.2% today, which is a boon for the stock market over the longer term. I know the talking heads on the financial media say that the market is overvalued, but they’re not considering the low interest rates. Currently, the Dow and S&P 500 yield 2.37% and 1.74%, respectively, so they both yield considerably more than the 10-year Treasury yield. As a result, yield-hungry investors in search of yield will turn to dividend-paying stocks.
The bottom line: the U.S. stock market remains an oasis.
So, rather than get caught up in the Wall Street mania, I encourage you to instead focus on building up your portfolio with high-quality stocks with strong earnings and sales growth. I’ve been in the investing game for more than 40 years now, and I have found that the best defense is a strong offense of fundamentally superior stocks.
Now, if you’re not sure where to look, you may want to consider my Platinum Growth Club Model Portfolio, as it’s chock-full of fundamentally superior stocks. I have more than 100 stocks across all of my services, and each and every one boasts strong sales and earnings growth. Of course, you don’t have to invest in all 100+ stocks. If you’d rather start small, I’ve got you covered there, too. My Platinum Growth Club comes with my exclusive Model Portfolio. I handpick all of my Model Portfolio recommendations from my different stock services — Growth Investor, Breakthrough Stocks and Accelerated Profits — so you can rest assured that you’re always invested in the crème de la crème.
And as a Platinum Growth Club subscriber, you’ll have full access to all of my services, including every Weekly Update, Monthly Issue and Flash Alert, as well as my exclusive Platinum Growth Club Live Chat events. Speaking of, I will be hosting a Live Chat event for July tomorrow, July 21, at noon. I’ll be covering a wide variety of topics, including my current market outlook, the second-quarter earnings season and the “Goldilocks” environment. I will also take time at the end of the session to answer subscriber questions. So, if you sign up now, you can send me your questions ahead of time.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Amazon.com, Inc. (AMZN), Facebook, Inc. (FB), Alphabet Inc. (GOOGL)
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