Early in the week, the market was singing “Mama Mia, here I go again!”, as COVID-19 resurfaced. Those fears were particularly apparent on Thursday when Japan declared a state of emergency and announced there would be no spectators at the Summer Olympics. On that news, the market sank over 2% and bond yields retreated to their lowest level since Valentine’s Day. Despite those headwinds, the major indexes managed to finish at record highs on Friday, with only the small caps finishing in the red, but with declining issues outnumbering advancing issues 4-3 following the July 4th holiday. At least for the Big Caps, it was another verse of Tom Petty’s “I Won’t Back Down”, as the S&P 500 gained 0.4%, the Nasdaq added 0.4%, while the Russell 2000 slid 1.1%. The Dollar was steady, Gold advanced 1.6%, and the yield on the Ten-Year Treasury dropped 7 basis points to 1.36%.
There was some evidence that the economy is cooling off, as the ISM services survey for June came in below expectations at 60.1 down from 64.0 in May. A reading over 50 is considered expansionary, so June’s number was still quite strong. There are also geopolitical storm clouds on the horizon, as the actions and rhetoric from China suggest a much less friendly environment for foreign investors and businesses. On the domestic front, we still have higher corporate taxes and anti-trust legislation being discussed.
Earnings season kicks off with most of the major money-center banks reporting results for the second quarter. The banks, as well as the S&P 500 as a whole, are forecasted to post record year-over-year results lapping the pandemic devastated results from 2020, which was the worst earnings decrease in a century.
On the economic calendar, Tuesday’s consumer price index release for June from the BLS will be in focus. Economists predict a 4.9% year-over-year rise, consistent with the last two months, and clearly much hotter than the 2.5% target rate. Whereas we embrace the role the Federal Reserve has played using monetary policy to bolster the economy during the two recent crises, we still are concerned that the current verse of “Pretending” that this surge in inflation is transitory could result in a painful reckoning later this year or in 2022. As such, we continue to suggest an allocation to gold as a hedge, as well as short-term TIPS (Treasury Inflation Protected Securities) as a core fixed income holding. Companies that own real assets should fare well, in addition to companies that are able to pass their cost increases on to their customers. Holders of long-term bonds yielding under 2% are accepting a negative real return on their money – a strategy that we don’t think makes any sense.
Stocks on the Move:
+10.7% Pitney Bowes Inc (PBI) sells, finances, rents, and services integrated mail and document management systems. The Company offers a full suite of equipment, supplies, software, and services for end-to-end mail stream solutions. Last week, Pitney Bowes jumped after its competitor, Stamps.com, agreed to a $6.6B private equity sale to firm Thoma Bravo. Analysts are saying Pitney Bowes could potentially be a target for another buyer.
PBI is a 0.9% position in the North Star Dividend Fund.
-12.9% Phibro Animal Health Corporation (PAHC) operates as an animal health and mineral nutrition company. The Company offers antibacterials, anticoccidials, anthelmintics, vaccines, and nutritional products for the treatment of animals. Phibro Animal Health serves the personal care, industrial chemical, and chemical catalyst industries worldwide. Last week, Phibro Animal Health was downgraded by Barclays on valuation as the Company has risen over 48% this year.
PAHC is a 1.0% position in the North Star Micro Cap Fund.
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