What Did We See?
- U.S. Large Cap stocks, or the S&P 500 index, was up more than 8% in Q2.
- The developed markets of Japan was down less than 1%.
- Europe was up about 7%, the U.K. up more than 5%.
- Emerging Markets were up about 5% and Asia (Ex-Japan) was up almost 4%.
- Global fixed income returns were mostly positive during the quarter.
Where Do We Stand?
- The Second quarter gave us the fifth consecutive quarter of positive equity returns.
- Valuations remain extremely stretched while earnings growth has rebounded from pandemic levels.
- Current cash levels are trending downwards as I continue to look for opportunities to invest.
- I continue to rebalance your accounts accordingly to ensure targets are within acceptable ranges.
As economies around the world accelerate the easing of their Covid related restrictions, our eyes turn to the potential tightening of loose monetary policy. While the S&P 500 continues to make new highs almost weekly and interest rates remain low, inflation has reared its head. However, the outlook for the US economy remains robust with a projected GDP growth of 6% in 2021. Next year could see 4.5% and 2023 brings us back to a normalized 3.5%. This has been validated (so far) by the very strong corporate earnings growth we have seen in 2021. This leaves us somewhere in the middle of the party. The punch is flowing and everyone is dancing but we know there is a time coming when we all must go home.
I wanna get away
The fourth of July holiday has seen the highest level of travel in this country since well before the pandemic. Auto related travel is slated to break the record set in 2019 and air travel is booming again. The pent up demand for spending that I have talked about so often over the past few months is here. This has led to supply chain issues creating shortages for materials and hence, higher prices. This issue is being remedied as we speak. Jobs are being filled at a strong rate and suppliers are managing through the gaps. Notably, lumber prices which shot up to $1.70 a board foot has come back down to about $0.75 a board foot. This is still higher than “normal” but a lot more manageable now. As these supply chains normalize, inflation should also come under control.
Escape velocity
Earnings in the first quarter grew more than 20% year over year. This is compared to the first quarter of 2019 when the pandemic was wreaking havoc on our economy. With consumers back on track to spend their saved money and corporate capital expenditures set to ramp up, I see no reason the current trend does not continue. Vaccines have controlled the virus and new cases are now at pandemic lows. With almost 70% of the US population of adults vaccinated, people are out again. Furthermore, with such a high vaccination rate the ability of this virus to cripple the economy again is now behind us. Much like an airplane reaching the point where gravity no longer keeps it on the ground. We are flying and the only things stopping us now are engine problems or running out of gas.
Remain seated with your seatbelt fastened
Turbulence is inevitable on your journey today. The aforementioned supply shortages could wreak havoc on the recovery. Copper and lumber seem to be under control but there are other materials our economy needs that could cause problems. Food supply chains come to mind here. Computer chip shortages have been felt as well as the price of gas. Job growth could also slow as these issues come to bear. However, with supplemental employment insurance expiring around the country I would expect this problem to fix itself. Jobs are available and will be filled. But not without a fair amount of volatility. More Americans quit their job in April than any other month on record. There seems to be a fundamental shift in the relationship between workers and their employers that has been spurned by this pandemic. Major crises have a way of doing this. Workers are demanding more of their employers at the same time that employers are instituting more technology in their workflows. Does this lead to an era of rising wages, higher productivity and better living standards for all? This could be a good thing for the future.
Tailwinds for your journey
While the fundamentals right now are strong, this economy is going to need some help to continue growing in 2022 and beyond. Infrastructure spending is at the top of the list to provide such help. The deal recently struck in Congress has enough spending in it to provide jobs and wages for years to come. Not without political wrangling, the passage of a bill would be a great tailwind for the economy. It is domestic spending at its essence. On the monetary side, the Federal Reserve seems dedicated to keeping interest rates low into 2022. Only if inflation remains unreasonably high will they begin to address it. We are not there yet.
Enjoy your flight
As we write today, the glass is half full. The empty half reminds us that the virus is still out there, supply chain issues abound and many Americans are still out of work. The full half reminds us that the country is reopened, jobs are available for those that want to work and supply issues are being solved daily. It will take a lot of bad news to push central banks toward a meaningful withdrawal of monetary stimulus. Simply put, the focus for the time being is going to be on the jobs recovery. It’s best to wait until we are approaching full(er) employment levels to become realistically concerned with central bank intervention. Until then, enjoy your flight and don’t forget to thank your flight attendants.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.
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