What To Expect from the Stock Market in Q3 and Beyond

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(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).

Stocks ended higher last Tuesday as economic data beat estimates. The S&P 500 index was up for the fourth consecutive day, its longest rally since March. U.S. consumer confidence hit a 16-month high due to growing labor market optimism, re-openings, and reduced inflation fears.

In addition, U.S. home prices rose at their fastest pace in 15 years in April. This signaled that the demand for homes is continuing to outweigh the existing supply.

The market was mixed on the month’s final day, as investors continued to digest economic data and Federal Reserve comments. Federal Reserve Bank of Richmond President Thomas Barkin said he expects the job market to fix itself by the end of the summer.

Plus, ADP employment change data came in above estimates. This indicates that the economy added more jobs than expected last month.

Stocks closed higher on Thursday as the S&P 500 hit a fresh all-time high. The index was up for a sixth straight session, its longest winning streak since February. Jobless claims fell once again and beat expectations after two consecutive weeks of increases. ISM manufacturing data missed estimates but remained at high levels, which provides more optimism for the economy.

The market finished the week at record levels with a second straight weekly advance. Nonfarm payroll data showed that 850,000 jobs were added last month. That figure was higher than estimated and more than May’s job gains. Plus, the IMF boosted its 2021 and 2022 growth outlooks for the U.S., based on the assumption that the proposed infrastructure bill would boost growth.

Stocks finished today mixed as both the S&P 500 and Dow each pulled back from record levels. All major indexes had risen fresh record closing highs on Friday, propelled by a June jobs report. Stocks slid as oil prices became more volatile.

Market Outlook

 While the economy has been rebounding faster than expected, I expect growth to slow down slightly as we head towards the end of the year. The economy will still certainly grow, but it will increase more in line with pre-COVID levels as we head into next year.

In the meantime, I see the markets continuing their ascent, but not as broad as the past six months. At the beginning of the year, we saw cyclical value shares take off due to the economic recovery, but growth shares have bounced back over the past month.

I believe this will be short-lived as value stocks will come back into favor as the economy continues growing, albeit slower. Plus, the tailwinds that supported high-growth stocks are starting to fade. This is great news for value investors and the companies we hold.

The next driver for market performance is likely corporate earnings. I expect another batch of strong corporate earnings as pandemic risks continue to recede in many parts of the country. The stocks in our portfolio are especially poised to reap those benefits.

If you think about all the fiscal stimulus that the government poured into the economy, I believe a lot of that has not been spent. So, there is a lot of spending yet to come, which benefits many of the stocks in our portfolio.

In terms of inflation, the recent bouts of inflation have been driven by higher wages, leading to higher prices, but I expect higher prices to moderate as the U.S. labor force increases. Prices may still rise, but not as much as they have been and not enough to hamper growth in value companies like those we hold.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $434.16 per share on Wednesday afternoon, up $1.23 (+0.28%). Year-to-date, SPY has gained 16.88%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…

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