VNFA Riders are “gearing” up for Community Bike Works Virtual Spin-a-Thon 2021. Our team is assembling and beginning our fundraising efforts in support of local bike mentoring programs. This year’s virtual Spin-a-Thon will take place from September 18 to October 3. Learn more at Community Bike Works Virtual Spin-a-thon 2021 (pledgereg.com) and support our team at PledgeReg – Fundraising Team.
by Maurice (Mo) Spolan, Investment Research Analyst
The S&P 500, Dow Jones and Nasdaq were up +0.96%, +0.87%, and +1.03% respectively last week, continuing the very strong year for U.S. equities in which all three indices are up in the mid to high teens year-to-date. The strong stock market performance has been fueled by the expectation of very strong earnings. Corporations did not disappoint, as sales and earnings grew 25% and 89% in Q2 2021 versus Q2 2020. Q2 is anticipated to be the peak for both year-over-year GDP and earnings growth, given how week the comparison period was in 2020; but economic activity should remain strong to finish out the year.
The key economic data point released last week was job additions and unemployment. The U.S. economy gained 943,000 jobs in July, beating expectations. Correspondingly, the unemployment rate fell to 5.4%. Not coincidentally, the 10-year Treasury rose on the news from approximately 1.15% to 1.3%. The Fed has dual mandates of 2% inflation and 4.5% unemployment. While inflation has run meaningfully above the 2% threshold in the past few months, the Fed has not committed to raising rates since it also wants to bring unemployment down to 4.5%, and higher rates generally curb hiring. As unemployment creeps closer to the Fed’s target, the central bank is likely to be more willing to increase interest rates to fight inflation.
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.
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US ECONOMY |
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CONSUMER HEALTH |
POSITIVE |
Q2 U.S. GDP grew at a 6.5% annualized pace – a very strong number, historically speaking but below the 8.5% expectation. A lack of inventories resulting from a constrained global supply chain reduced GDP by nearly $200 billion. |
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CORPORATE EARNINGS |
POSITIVE |
With about 90% of S&P 500 constituents having reported Q2 results, sales and earnings growth are running at an astonishing 25% and 89% pace, respectively, when compared to the heavily depressed figures from Q2 2020. |
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EMPLOYMENT |
POSITIVE |
In June, the U.S. economy added 943,000 jobs, bringing the unemployment rate down to 5.4%. |
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INFLATION |
NEUTRAL |
Inflation accelerated to 5.4% in June. Jay Powell, Federal Reserve Chair, believes that the recent uptick in inflation is primarily attributable to global supply chain constraints, and that inflation will slow as such constraints resolve through the remainder of the year. |
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FISCAL POLICY |
POSITIVE |
The Senate voted to advance the $550 billion bipartisan infrastructure bill, opening up the bill to debate and amendments. |
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MONETARY POLICY |
POSITIVE |
The Federal Reserve indicated that it plans to hike rates twice in 2023. Previously, the Fed had suggested it would not raise rates until 2024. Nonetheless, the monetary posture remains accommodative. |
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GLOBAL CONSIDERATIONS |
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GEOPOLITICAL RISKS |
NEUTRAL |
There are few, if any, looming geopolitical risks that could upset the economic recovery. |
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ECONOMIC RISKS |
NEUTRAL |
With multiple vaccines in distribution and accommodative fiscal and monetary policies in place, 2021 is looking like one of the strongest economic years on record. The primary risk at present is that of persistent inflation which begets 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.
“I can’t change the direction of the wind, but I can adjust the sails to always reach my destination.” – Jimmy Dean
This week “Your Financial Choices” will be a pre-recorded show. Tune into WDIY 88.1 FM Wednesday from 6 -7 p.m. Listen to past shows online at yourfinancialchoices.com or wdiy.org. Questions submitted online will be addressed during the next live broadcast.