Daily Archives: July 6, 2021

The Numbers & “Heat Map”

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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 June, the U.S. economy added 850,000 jobs, beating expectations handily. The unemployment rate is 5.9%, well within normal parameters.

INFLATION

NEUTRAL

 Inflation cooled somewhat in May, decelerating to a 3.5% pace year-over-year, compared to 4.5% in April. Jay Powell, Federal Reserve Chair, believes that the recent uptick in inflation is prima rily attributable to global supply chain constraints, and that inflation will slow as such constraints resolve themselves through the remainder of the year.

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 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.

Current Market Observations

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by Maurice (Mo) Spolan, Investment Research Analyst
Last week, the S&P 500, Nasdaq and Dow were up 1.71%, 1.39%, and 1.5%, respectively. The positive week was consistent with first half performance for the three leading indices, all of which are up between 12.5%-14.4% through 2021’s first six months. The Dow had a quick start to the year while the tech-heavy Nasdaq lagged, but at this point, the performance disparity between any of three indices is immaterial, illustrating the breadth of the market rally.  Historically, strong first-halves portend strong second-halves; per Refinitiv, in every year since 1950 in which the S&P and Dow were up double-digits to start the year, they were positive in the final six months.

Economic indicators also suggest a strong second half of 2021 is forthcoming. The unemployment rate is well within normal range, sitting just below 6%, while the housing economy – represented by home prices and remodeling & renovation activity – is in its strongest condition since the Great Financial Crisis. Crude oil is priced at $75 – a three-year high – as the appetite for travel and mobility are surging. As a result of these trends and more, the International Monetary Fund has increased its projection for U.S. 2021 GDP growth from 4.6% to 7%; should the forecast come to fruition, it would represent one of the strongest years on record.

If there is a risk to the economy – and therefore, possibly the markets – over the coming six months, it is that of overheating. Inflation surged above 4% in April as aforementioned demand trends met a constrained global supply chain, leading to higher prices. Inflation cooled somewhat in May, increasing approximately 3.5% year-over-year. The traditional monetary policy response to inflation is rate hikes, as these incentivize consumers to save rather than spend. The Federal Reserve holds a long-term inflation target of 2% but has stated that it will let inflation run above 2% for some time to facilitate a strong economy. Jay Powell, the Fed Chair, believes recent inflation numbers are transitory and will ease as supply chain bottlenecks resolve. At present, the market is expecting the Fed to raise rates twice in 2023; accordingly, the risk is that inflation does not prove transient and the Fed hikes rates during 2022. Nevertheless, modestly higher rates are unlikely to unhinge the financial markets so long as economic growth remains strong.

VNFA NEWS

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