Market Update for August 2021
Market Update for August 2021

Market Update for August 2021

 

By:

Kevin Rice
Kevin Rice
Senior Investment Strategist
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Market Update for August 2021

Market Update from TC Wealth Partners

Introduction

U.S. equity indexes hit new highs, bucking the traditional trend that August is one of the worst performing months for stocks. The spread of the coronavirus Delta variant, inflation concerns and labor shortages were not enough to keep the markets down. As we move towards the latter half of this year, we expect Fed policies and renewed pandemic headwinds to increase market volatility. However, any accompanying weakness in the market will prove temporary because the broader economic and corporate earnings expansions have, in our view, plenty of potential growth ahead.

COVID

The global spread of the Delta variant resulted in flashes of investor anxiety that led to temporary pullbacks in stock prices during the month. New COVID-19 cases in the U.S. rose throughout August, raising concerns that spreading infections could derail the economic recovery (See Exhibit 1). In Asia, outbreaks closed some shipping ports. Vietnam partially halted manufacturing, and Japan extended its lockdown protocols. Over the Labor Day weekend, airports saw daily passenger counts more than double what they saw in 2020, but they still lagged pre-pandemic totals from 2019. According to Arrivalist, roughly 43 million Americans took a road trip, a 1% dip from last year and a 10% drop from 2019.

Exhibit 1
Exhibit 1: TC Wealth Partners, Bloomberg, Data as of 9/9/2021
Our View Starting in the middle of August the nationwide positivity rate started to drop and the broad trend in COVID cases was somewhat encouraging before the long Labor Day weekend. By late September we should be able to assess the true impact of the holiday weekend on cases. Last year we saw an increase in transmission around Labor Day. Therefore, we think it is too early to call the peak of the Delta wave.

Inflation

U.S. consumer price increases slowed in July even as they remained at a 13-year high on a yearly basis and there were tentative signs inflation has peaked as supply-chain disruptions caused by the pandemic work their way through the economy. The consumer price index increased 0.5% in July after climbing 0.9% in June. In the 12 months through July, the CPI advanced 5.4%. The drop in the month-to-month inflation rate was the largest in 15 months. Price gains for used cars and trucks, which have accounted for an outsized chunk of the inflation boost in recent months, rose 0.2%, a sharp drop from the 10.5% increase the prior month. The U.S. vaccination drive, with nearly 170 million Americans immunized against COVID, and the arrival of summer with less restrictions compared to last year, caused hotel room rates to rise by 6% in July.

Our View The details of the latest consumer price report favored our view that the recent degree of inflation will not last through the end of next year, as prices in categories most closely associated with the economy’s reopening have begun to ease. However, there was also evidence that price pressures continue to broaden out, which we believe should keep the heat turned up on inflation in the coming months. We expect inflation to remain elevated through part of next year before slowing through the end of 2022.

Federal Reserve

In a much-anticipated speech on August 27 as part of the Federal Reserve’s annual Jackson Hole, Wyoming, symposium, Chairman Jerome Powell said the economy has reached a point where it no longer needs as much policy support. That means the Fed likely will begin cutting the amount of bonds it buys each month before the end of the year, so long as economic progress continues. Based on statements from other central bank officials, a tapering announcement could come on September 22, the end of the Fed’s two-day meeting.

Our View We believe that the removal of monetary stimulus by the Federal Reserve will be gradual and come in stages. First, the Fed will talk about tapering, laying out a plan that includes timing and a trajectory. We expect to learn more details about this after the Fed meeting in September, including the reduction in monthly purchases. Next will come the actual reduction in asset purchases, which we think is likely to start late this year or early 2022. Finally, we think the Fed will tighten, which will come in the form of rate hikes sometime in 2023. Even after the Fed begins to taper and tighten, we believe that monetary policy conditions will remain accommodative for a while.

Unemployment

Nonfarm payrolls grew by 235,000 versus consensus expectations for a gain of around 750,000 in August. Previous months’ gains were revised higher, however, and the unemployment rate fell to a new pandemic-era low of 5.2%. The impact of the delta variant of the coronavirus was clear as hiring in leisure and hospitality grounded to a halt. The NFIB small business survey showed the share of businesses reporting that jobs are hard to fill rose to its highest on record in August. The number of people not looking for work because of coronavirus concerns remained stuck in August at around 1.5 million for the third consecutive month.

Our View Children returning to school will allow some parents to rejoin the workforce, while the coming end of extended unemployment benefits should also result in a moderate increase in the labor supply. We expect hiring challenges to persist though over the next few months, as the Delta wave has reignited health concerns and injected uncertainty about whether children will be able to stay in the classroom this fall without some intermittent periods of remote learning or daycare closures.

Domestic Equities

A strong recovery in economic growth and corporate earnings boosted U.S. stocks in August. Stocks continued to hit new all-time highs, bringing the tally to more than 50 record closes so far this year. The S&P 500 has risen nearly 20% year-to-date, which ranks fifth in annual price gains over the last 20 years (See Exhibit 2). 2021 is also the ninth year since 1991 in which the stock market was up more than 10% by Labor Day. The market posted an additional gain from September to year-end in each of those instances, averaging another 8.8%.

Exhibit 2
Exhibit 2: TC Wealth Partners, Bloomberg, Data as of 9/9/2021
Our View We expect market volatility to increase, particularly if concerns of the Fed taper or economic momentum spur a further defensive shift from equities into the safety of bonds. We believe any such declines would be temporary because the broader economic and corporate earnings expansions have, in our view, plenty of potential growth ahead.

International Equities

European equities gained in August, supported by a positive Q2 earnings season and ongoing economic recovery from the pandemic. The Delta variant of Covid-19 continued to spread but most large eurozone countries have now vaccinated around 70% of their population against the virus. Emerging market equities registered a positive return in August. This was despite a mid-month sell off on concerns over the spread of the Delta variant of Covid-19 in Asia, and as the dollar strengthened amid concerns over Federal Reserve tapering.

Our View We believe COVID/vaccine headlines will continue to drive equity prices in international markets. In our view, the large amount of stimulus in the U.S. should provide a boost to emerging market stocks, but some countries will benefit from strong fundamentals growth while others continue to face challenges dealing with COVID.

Fixed Income

The 10-year Treasury yield spent most of the month of August anchored around 1.30%. Markets appear conflicted about where rates will head next. On the one hand, the rise of the Delta variant has pulled down forecasts for economic growth in the near term and raised new questions about the Federal Reserve’s plans for tapering its asset purchases later this year. Additional uncertainty is also present in fiscal policy as policymakers in Washington D.C. are grappling with the prospects for a potential government shutdown, a debt ceiling showdown and a Democratic intraparty fight over several trillion dollars of new taxes and spending.

Our View All that said, we continue to believe there is a case for yields to head higher from here, albeit to a still-low level by historical standards. We expect the combination of ongoing growth, the commencement of the Fed taper, and stickier inflation to lead longer-term rates gradually higher. With the Fed not likely to hike rates for some time, we think the yield curve can steepen from here, which is aligned with our view of renewed momentum in the economic recovery.

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Tags:  2021, COVID, Domestic Equities, Federal Reserve, Fixed Income, Inflation, International Equities, Market Update, Unemployment

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