VNFA NEWS

Welcome Debra Almack to Team VNFA!

We are pleased to welcome Debra Almack, CPA, to our team as a Senior Accountant. Debra has been a Certified Public Accountant for almost 30 years, and she has a breadth of experience in tax and corporate accounting. She will work with our Chief Financial Officer as part of the internal finance and accounting team based in our Bethlehem headquarters.

Current Market Observations

by William Henderson, Vice President / Head of Investments
Last week, the markets saw negative returns after posting positive gains for several consecutive weeks. Of the three major indexes, the Dow Jones Industrial Average saw the biggest weekly decline, and the largest decline for that index in more than eight months. Value-style stocks once again underperformed growth stocks as the NASDAQ saw only a modest pullback. For the week that ended June 18, 2021, the Dow Jones Industrial Average lost -3.5%, the S&P 500 Index fell by -1.9%, and the NASDAQ fell by only -0.3%. Modest pullbacks are to be expected in any healthy stock market and last week’s negative returns did not significantly chip away at this year’s strong year-to-date returns. Year-to-date, the Dow Jones Industrial Average has returned +9.8%, the S&P 500 Index +11.7%, and the NASDAQ +9.2%. Bonds had a quick reversal during the week, with the 10-year U.S. Treasury initially spiking to 1.57% after the Federal Open Market Committee (FOMC) announcement about interest rates (more on that below) but calmed down by week’s end to close at 1.44%. (See the 5-day chart below of the U.S. 10-year Treasury Note – CNBC) 

The news of the week was certainly the FOMC meeting and the follow-up press conference by Chairman Jay Powell. The Fed raised its inflation forecast, and a dot plot of individual central bank members’ expectations on policy, signaled that an interest hike could happen sooner than expected, in 2023. Investors typically get spooked with the mention of higher interest rates, as cheaper (lower) rates help to spur economic growth. Further, St. Louis Fed President James Bullard told CNBC on Friday that he expected an initial rate increase to happen even sooner in 2022. “We’re expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting,” Bullard said on CNBC’s Squawk Box. “I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.” That comment was in direct contradiction of Powell’s press conference comments that higher interest rates were not expected until 2023-24.   

Clearly, the markets are seeing the trends. First, global stimulus in the form of dollars to consumers is fading, which will lead to a contraction in in M2 (supply of money and savings). Second, the temporary demand/supply imbalances are ebbing allowing commodity prices to stabilize (lumber, critical for new building, led the way lower – see chart below from the Federal Reserve Bank of St. Louis). 

Third, the global economic rebound is continuing and now includes the Eurozone. These trends overall are positive for the market and continued economic growth, but they also point to inevitably higher interest rates in the not-to-distant future. The Fed will watch for inflation, which thus far has appeared (as mentioned last week, with the 5% jump in the Consumer Price Index). The question remains about whether the inflation will be transitory or more permanent. For us, the picture remains clear: last year featured collapsing global growth and massive stimulus. Looking at 2021-23 we see healthy growth and a cooperating Federal Reserve that is timid about raising interest rates too quickly.   

The Numbers & “Heat Map”

THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Interest Rates: Federal Reserve, Mortgage Bankers Association.

MARKET HEAT MAP
The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.

US ECONOMY

CONSUMER HEALTH

POSITIVE

The OECD forecasts that the global economy will grow 5.6% and 4.4% in 2021 and 2022, respectively.

CORPORATE EARNINGS

POSITIVE

S&P 500 Q1 sales and earnings growth were very strong. Corporate earnings are likely to remain strong throughout 2021 on a “year-over-year” basis as companies compare their results to depressed 2020 numbers.

EMPLOYMENT

POSITIVE

In May, the unemployment rate declined to 5.8%, from 6.1% in April.

INFLATION

NEUTRAL

Inflation was 4.5% in April. Inflation has generally been tame since the Great Financial Crisis, less than 2%; however, prices have been increasing in 2021 as a result of a tight labor market and supply chain constraints. The debate at-hand is whether recent inflation numbers are merely passing or here to stay.

FISCAL POLICY

POSITIVE

President Biden recently unveiled a stimulus package directed towards infrastructure that would total more than $2 trillion over eight years. President Biden is also considering a significant capital gains tax increase.

MONETARY POLICY

POSITIVE

The Federal Reserve indicated this week that it plans to hike rates twice in 2023. Previously, the Fed had suggested it would not raise rates until 2024. Nonetheless, the monetary stance is accommodative in the near future.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

NEUTRAL

There are few, if any, looming geopolitical risks that could upset the economic recovery.

ECONOMIC RISKS

NEUTRAL

With multiple vaccines in distribution and highly accommodative fiscal and monetary policies in place, 2021 may be one of the strongest economic years on record. If a risk is present, it may be that the economy will overheat, thereby leading to inflation and higher interest rates.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.