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2021 Q2

As we enter the dog days of summer, I am reminded of a reference from F. Scott Fitzgerald in The Great Gatsby regarding summer: “And so with the sunshine and the great bursts of leaves growing on the trees, just as things grow in fast movies, I had that familiar conviction that life was beginning over again with summer.” This past quarter we have seen bursts of economic growth and what feels like a new beginning. 

The economy is playing out in much the way we discussed in the past few newsletters. It is a solid recovery with demonstrable economic growth and an uptick in market volatility as it gains traction. As I have mentioned to many of you, the U.S. economy is situated to continue to grow. Current pressures, such as supply chain constraints which have hampered businesses, should subside in the next six months. This includes the labor market where a shortage of workers has created a 9+ million job crunch. The additional unemployment benefits that expire in September, and that have already been removed by several states, should bring further relief to businesses looking for employees. 

We have not forgotten about bigger budget deficits, inflation, and potentially higher interest rates corresponding with the massive fiscal stimulus programs, but we see these as future issues that will not diminish current economic growth. On the other hand, the Federal Reserve may be underestimating the stickiness of some of the current and coming inflation. While supply chain constraints will certainly be resolved in due time, the labor markets are a different story. Wage inflation can be very sinister and when it begins it is difficult to stop. It is due to this that we are more skeptical of the Fed’s transitory stance. If the labor market is slow to normalize, there is a much greater chance that some portion of the “temporary” inflation becomes more permanent. Lastly, while interest rates have unexpectedly pulled back in the second quarter, we expect them to begin climbing again in the second half of the year. 

As for the stock market, we believe it to be fully valued despite impressive economic growth, due to its strong recovery over the past twelve months. There could be a period of consolidation or even a normal pullback allowing for earnings to catch up to prices and bring P/E multiples down. While there are no obvious fiscal barriers to the economy, there are possible headwinds. The biggest potential risk is a renewed focus by the government and media on new strains of COVID. With the media having such influence, we believe its reporting on COVID continues to be a headline risk to markets. Additionally, new government regulations, potential executive orders, and states’ class action lawsuits create further, more specific, challenges going forward. 

With much of the good news already priced in and equity markets fully valued, it is even more imperative we focus on investing in companies with strong fundamentals and solid balance sheets. On the fixed income side, we have incrementally increased our exposure to positions that will protect against higher interest rates and inflation going forward. 

If you would like to discuss any area in more detail please do not hesitate to reach out to us. As always, thank you for your trust. 

Marc Henn, CFP®