Each of the major indices are down well over 1% with the Dow and small-cap Russell 2,000 down even more having fallen over 2% as of this writing.  Meanwhile, Treasury yields are falling and at multi-month lows.  The main reason being attributed to the risk-off move today is jitters over the rising prevalence of the Delta variant.  To give some evidence to this being the catalyst, in the chart below we show the relationship between individual S&P 500 stocks’ performance today and back during the COVID crash from February 19th to March 23rd of last year.  As shown, there is a general correlation that exists between the performance of the two periods.  Some of the best performers today were also some of the best performers during the crash and vice versa. For example, Consumer Staples was the sector that held up the best during the COVID Crash last year with the average stock in the sector falling 24.04% versus an average decline of 38.7% for the entirety of the S&P 500. Today, several of the sector’s names are the top performers on the day as the average stock in the sector is only down 19 bps versus an average decline of nearly 2% for all S&P 500 stocks.  Click here to view Bespoke’s premium membership options.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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Labor Markets

The CFO Survey: Data & Results – Q2 2021 (Richmond Fed)

While CFOs reported a huge uptick in concern over labor quality and availability, optimism over their specific company’s prospects hit the second-highest level ever and general confidence about the trajectory of the US economy was improved as well. [Link]

McDonald’s Owners Offer Tuition, Child Care to Lure Burger Flippers by Heather Haddon (WSJ)

Franchisees are expanding their benefit packages in order to hire workers, with higher wages, paid time off, and tuition coverage also being offered in order to attract workers amidst and extremely tight labor market for restaurant workers. [Link; paywall]

Environment

A “wobble” in the moon’s orbit may lead to record floods on Earth by Sophie Lewis (MSN)

In addition to rising seas thanks to higher temperatures, flooding will worsen over the next couple of decades as a wobble in the moon’s orbit drives unusually high tides that may overwhelm costs even without a storm surge or higher sea level. [Link]

People dumped their pets into lakes, officials say. Now football-size goldfish are taking over. by Reis Thebault (WaPo)

While goldfish in bowls tend to be pretty small, when released into the environment they can grow to impressively large sizes while also badly disrupting the ecosystems they’re released in to. [Link; soft paywall]

Have you ever wondered why we don’t find fossils in the Appalachian mountains? The truth is, we do, they’re just not the kind of fossils you might think of—there are no mammals, no dinosaurs, no reptiles. There’s something else entirely. by Alex (ThreadReader)

A fascinating read on the absolutely ancient Appalachians, which were produced through multiple continental collisions and are part of the same mountain range that covered northern Britain and Scandinavian. [Link]

Tight Supply

Here’s Who Will Be Left Behind in the Housing Boom by Ali Wolf (NYT)

With out-of-town buyers that have much higher incomes than locals fueling the housing boom since COVID hit, current residents are unable to compete. The result is a huge shift in the housing market. [Link; soft paywall]

Build-to-Order Gains Momentum at Long Last by Steve Finlay (Wards Auto)

Traditionally, automakers have built inventory for consumers to purchase on the spot. But tight inventories and the success of non-dealer models like Tesla have led to shifts in the traditional approach. [Link]

Infrastructure

China Buys Friends With Ports and Roads. Now the U.S. Is Trying to Compete. by Stu Woo and Daniel Michaels (WSJ)

In response to China’s soft power “Belt & Road” initiative, the US is ramping up investments in various types of infrastructure around the world as a way to counter the Chinese effort to win friends with cheap loans and direct investment in ports, communications, and railways. [Link; paywall]

Investing

Treasury Wants Large Holders of 2020 Note to Identify Themselves by Liz McCormick (Bloomberg)

A 2020 ten year note issue may have had extreme concentration, leading the Treasury to demand large holders to identify themselves, part of its regular efforts to ensure nobody corners the market in a given bond. [Link; soft paywall]

Robinhood, Others Upend Rules for Early IPO Trading by Corrie Driebusch (WSJ)

Rather than being forced to hold for the traditional six months, early investors in Robinhood will be able to sell 15% of their holdings immediately and 15% three months later with full restrictions lifted after six months as is typical. [Link; paywall]

Wall Street Has Surrendered to the $500 Billion ETF Rush by Claire Ballentine and Francesca Maglione (Bloomberg)

We’re only a couple of days in to the second half, but ETFs are on track to break the $497bn record inflows ETFs recorded in 2020; that means the full annual flow total is likely to be substantially higher. [Link; soft paywall]

Overdoses

US overdose deaths hit record 93K in pandemic last year, a 29% increase (Associated Press/NYP)

Exploding prevalence of fentanyl and policy responses to the pandemic drove a huge increase in overdoses last year. [Link; auto-playing video]

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Have a great weekend!

Taking a look at our Seasonality Tool, it is hard to find a day in the year that will give a weaker reading for the one month to three month periods.  As shown in the snapshot of the tool below, over the past decade, the one month period from mid-July has a median loss of 0.34%. That stands in the 13th percentile of all periods of the year.  Meanwhile, three month performance ranks even weaker in the bottom 2% of all periods with a median decline of 1.19%.

To show this in another light, in the chart below we show the average 3 month forward performance over the past 30 years for each calendar day of the year.   July is the only major period of the year in which the forward 3-month performance consistently leans negative.

While over the long term mid-July and the next few months have been one of the weaker periods of the year, more recently things have been a bit better. In the chart below, we show the S&P 500’s average performance from July 15th out over the next three months.  While the 10 and 20-year averages show the S&P 500 is typically flat or slightly lower through the summer and early fall, the index has actually on average trended higher over the past five years.  In other words, that seasonal weakness has been less evident in recent years. Click here to view Bespoke’s premium membership options.

Of the array of economic data released this morning, perhaps the most impressive was the New York Fed’s reading on the manufacturing sector.  The headline index came in at 43, smashing estimates by 25 points.  As we show below, that was one of the strongest readings relative to expectations since 2002 with the only bigger beat being last June. Not only was it impressive relative to expectations, but the release also set a record high. In addition to the July reading being a record high, the month-over-month change was the fourth largest on record behind May and June of last year and May of 2003.

Driving the surge in the headline number were big improvements across categories, but especially for New Orders, Shipments, and Inventories. The MoM increases for each of those categories ranked in the top 5% of all months and left them at some of the highest readings on record.  While most categories improved versus June, there were three outliers: Delivery Time, Prices Paid, and Average Workweek.

Demand-related indices were some of the most impressive areas of the report.  New Orders surged 16.9 points to 33.2 which was the highest level since 2004.  That massive acceleration in orders growth meant backlogs grew at a more rapid pace as Unfilled Orders rose 4.2 points.  Even though that is a historically strong level, it was 9.3 points below the even more elevated readings from earlier in the spring.  Fortunately, manufacturers appear at least somewhat more capable of fulfilling those orders.  Shipments surged to 43.8 which, like new orders, was the highest level in the index since 2004.  Additionally, inventories grew at a rapid rate.  The Inventories Index rose 18.8 points from a contractionary reading last month to one of the highest levels on record.

One likely reason for the massive increase in inventories and shipments is some normalization in supply chains.  The index for Delivery Times measures how long it takes for supplier products to arrive.  Higher readings indicate longer lead times and vice versa.  Over the past year, these indices have surged to unprecedented levels across regional Fed and other manufacturing reported.  While the Empire Fed’s reading is still extremely elevated from a historical context, the 9.6 point drop month over month marked a significant improvement in lead times.

Input price pressures have also subsided a bit.  Similar to the Delivery Times index, the index for Prices Paid is extremely elevated but showed some relief in July.  That was not the case for Prices Received though.  That index continued to rise with both the current conditions and 6-month expectation indices reaching record highs in July.

In terms of the expectations indices, the only other one to reach a record in June was for the Number of Employees.  The increase in that index was matched by a sizeable uptick in the current conditions index as well.  That index rose 8.8 points to the highest level since June 2018 indicating the region’s manufacturers continue to have a strong appetite for labor and are in fact taking on more workers. Click here to view Bespoke’s premium membership options.