First Forward Podcasts

What's Going on in the Stock Market? Q2 Economic Recap (July 29, 2021)

Episode Summary

We’re getting into the performance of the economy and financial markets in the second quarter, expectations for the remainder of the year, and the hottest economic topic of them all — Inflation.

Episode Notes

We break down key changes in the stock market and economy in Q2 and address what's been top of mind for most investors and business owners: inflation.

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Episode Transcription

YOU’RE LISTENING TO INVESTMENT INSIGHTS FROM FIRST AMERICAN BANK.

WE'RE GETTING INTO THE PERFORMANCE OF THE ECONOMY AND FINANCIAL MARKETS IN THE SECOND QUARTER, EXPECTATIONS FOR THE REMAINDER OF THE YEAR, AND THE HOTTEST ECONOMIC TOPIC OF THEM ALL – INFLATION.

HERE’S YOUR HOST FOR TODAY’S EPISODE, CHIEF ECONOMIC OFFICER, KURT FUNDERBURG.

THE SECOND QUARTER OF 2021 HAS PLAYED OUT MOSTLY AS EXPECTED WITH STRONG GROWTH POWERED BY THE REOPENING AND BUOYANT CONSUMERS. GROWTH EXPECTATIONS HAVE BEEN TEMPERED OVER THE PAST MONTH AS COVID HAS FAILED TO RETREAT ACROSS MANY PARTS OF THE GLOBE AS QUICKLY AS EXPECTED JUST A FEW MONTHS AGO AND AS THE RATE OF VACCINATION IN THE U.S. HAS SLOWED MATERIALLY. THE ATLANTA FED GDP NOW FORECAST FOR THE SECOND QUARTER, WHICH SPENT MOST OF THE PAST THREE MONTHS AT 10% OR HIGHER HAS RETREATED MATERIALLY TO 7.6% OVER THE PAST FOUR WEEKS. THE BLUE-CHIP CONSENSUS RANGE FOR SECOND QUARTER GDP HAS BEEN MORE CONSISTENT, NARROWING ON SLIGHTLY TO 7 TO 11% WITH A POINT ESTIMATE OF 9%, VERY CLOSE TO WHERE IT WAS IN APRIL.  

FINANCIAL MARKETS CONTINUED TO REFLECT OPTIMISM FOR A STRONG ECONCOMIC RECOVERY AND A SIGNIFICANT REBOUND IN CORPORATE PROFITS. EQUITY MARKETS WERE BROADLY HIGHER IN THE SECOND QUARTER EVEN ON TOP OF THE EXTRAORDINARY GAINS IN THE PREVIOUS 12 MONTHS. AFTER VALUE STOCKS, MANY OF THEM CYCLICAL BENEFICIARIES OF THE ECONOMIC RECOVERY LED THE WAY IN THE FIRST QUARTER, THE MEGA-CAP TECH STOCKS THAT CARRIED THE MARKET HIGHER FROM THE MARCH 2020 BOTTOM WERE AGAIN ASCENDENT IN THE SECOND QUARTER. THE S&P 500 ADVANCED MORE THAN 8 AND HALF PERCENT IN THE QUARTER. THE TECH-HEAVY NASDAQ COMPOSITE INDEX ADVANCED 9.7% WHILE THE NEW YORK FANG INDEX, COMPRISED OF THE WORLD’S LARGEST TECH COMPANIES GAINED 12.3%. THE RESURGENCE OF MEGA CAP TECH STOCKS WAS DUE MAINLY TO CONCERNS THAT ECONOMIC GROWTH WOULD SLOW FASTER THAN PREVIOUSLY EXPECTED AND WORRIES OVER THE RESURGENCE OF COVID. THE LARGE CAP TECH STOCKS HAD ALSO BEEN THROUGH A PERIOD OF UNDERPERFORMANCE VERSUS THE BROADER MARKET AND INVESTORS MOVED TO PICK UP PERCEIVED BARGAINS. BONDS ALSO GOT INTO THE ACT IN THE SECOND QUARTER AFTER A ROUGH NINE MONTHS SINCE INTEREST RATES BOTTOMED OUT LAST SUMMER. WITH YIELD ON THE 10-YEAR US TREASURY BOND FALLING NEARLY A THIRD OF A PERCENTAGE POINT TO 1.45% THE BLOOMBERG AGGREGATE BOND INDEX AND THE BLOOMBERG US TREASURY BOND INDEX BOTH POSTED RETURNS GREATER THAN 3% IN THE SECOND QUARTER AS PRICE APPRECIATION COMPLIMENTED VERY LOW NOMINAL YIELDS.  AGAIN, THE STRONG PERFORMANCE OF BONDS IN THE SECOND QUARTER REFLECTS CONCERNS THAT ECONOMIC GROWTH MAY HAVE ALREADY PEAKED AND COULD SLOW OVER THE REMAINDER OF THE YEAR.

NOW, LET’S MOVE ON TO OUR OUTLOOK FOR THE REMAINDER OF 2021. WE CONTINUE TO EXPECT HEALTHY, IF SLOWING ECONOMIC GROWTH OVER THE REMAINDER OF THE YEAR WITH FULL YEAR GDP GROWTH STILL HAVING A GOOD CHANCE OF REACHING IF NOT EXCEEDING 6% FOR THE FIRST TIME IN NEARLY 40 YEARS. WITH THE DELTA VARIANT OF COVID SURGING IN MANY COUNTRIES INCLUDING THE U.S., THERE IS A CHANCE OF DOWNSIDE SURPRISES TO OUR GDP GROWTH FORECAST THAT WE DID NOT ANTICIPATE A FEW MONTHS AGO. WHILE WE DON’T BELIEVE THERE WILL LOCKDOWNS OR RESTRICTIONS ANYTHING LIKE WE SAW LAST YEAR PUT IT PLACE EVEN IN LIMITED LOCAL AREAS, WE’VE ALREADY SEEN MASK MANDATES AND HESITANCY ABOUT A FULLY NORMAL RETURN TO SCHOOL IN THE FALL SURFACE IN SOME PLACES. ADDITIONALLY, GROWTH REMAINS STUNTED IN MANY COUNTRIES AROUND THE WORLD EITHER PLAGUED BY COVID’S RESURGENCE OR LACK OF DELIVERABLE VACCINES. EVEN CHINA, WHICH RECOVERED QUICKLY FROM COVID AFTER THE INITIAL HIT EARLY IN 2020, HAS SEEN ITS ECONOMIC GROWTH BEGIN TO SLOW. WHILE THE U.S. IS MORE SHELTERED FROM VARIATIONS IN GLOBAL GDP GROWTH THAN MANY OTHER COUNTRIES, SLOWER GLOBAL GROWTH DOES LIMIT THE AMOUNT OF UPSIDE FOR OUR ECONOMY.  EVEN WITH THE RENEWED SHADOW OF COVID LOOMING AND THE INTERNATIONAL ECONOMIC RECOVERY LAGGING OUR OWN, WE THINK THAT CONSUMERS FLUSH WITH CASH, OPTIMISTIC ABOUT THE LABOR MARKET, AND DETERMINED TO RETURN TO A LIFE AS CLOSE AS THEY LIVED IN 2019 AS POSSIBLE WILL POWER THROUGH AND KEEP THE ECONOMY EXPANDING OVER THE REMAINDER OF THIS YEAR AND INTO 2022. IT IS POSSIBLE THAT WHAT DELAYS WE SEE TO A FULL AND ROBUST REOPENING THIS YEAR WILL SIMPLY DEFER SOME OF 2021’S GDP POTENTIAL INTO 2022 AND INCREASE THE DURATION OF THE CURRENT EXPANSION. OVER THE LONG-TERM, BEGINNING IN 2023, WE EXPECT THAT GDP GROWTH IN THE U.S. WILL RETURN TO SOMETHING NEAR THE 2.0% TO 2.5% GROWTH THAT HAS BEEN THE NORM SINCE THE GLOBAL FINANCIAL CRISIS.

WE EXPECT THAT EQUITY MARKET GAINS WILL CONTINUE OVER THE REMAINDER OF THE YEAR, ALTHOUGH WE EXPECT THE PACE OF GAINS TO MODERATE FURTHER AND FOR MARKET VOLATILITY TO INCREASE. EQUITY VALUATIONS, AT RECORD HIGH LEVELS ON MANY METRICS, REMAIN A SIGNIFICANT CONCERN FOR US. EVEN SO, VERY LOW INTEREST RATES, ESPECIALLY REAL OR AFTER-INFLATION RATES AND EXPECTATIONS FOR VERY STORNG CORPORATE EARNINGS GROWTH MEAN THAT EQUITIES CONTINUE TO PROVIDE THE BEST CURRENT PROSPECTS FOR LONG TERM CAPITAL APPRECIATION IN OUR JUDGEMENT. PLEASE REACH OUT TO YOUR FIRST AMERICAN BANK WEALTH MANAGEMENT ADVISOR IF YOU HAVE QUESTIONS ABOUT YOUR PORTFOLIO.

FINALLY, LET ME TOUCH BRIEFLY ON THE ECONOMIC TOPIC DOMINATING THE HEADLINES CURRENTLY – INFLATION. THE OVERALL CHANGES IN THE LEVEL OF PRICES IN THE ECONOMY, INFLATION, AS MEASURED BY THE BUREAU OF LABOR STATISTICS CONSUMER PRICE INDEX OR CPI, HAS EXCEEDED EXPECTATINOS FOR THE LAST FEW MONTHS. IN FACT, FOR THE MONTH OF JUNE, CPI REACHED AN ANNUAL RATE OF 5.4% - A RATE OF PRICE INCREASE NOT SEEN SINCE 1990. PRICE INCREASES HAVE MADE HEADLINES FOR A MONTHS NOW ABOUT ITEMS AS DIVERSE AS LUMBER, USED CARS AND HOTEL ROOM RATES. MANY OBSERVERS ARE CONCERNED THAT INFLATION WILL NOT, AS CLAIMED BY THE FEDERAL RESERVE, BE TRANSITORY OR SHORT-LIVED IN NATURE BUT WILL BE MORE ENDURING. WE VIEW THE JURY AS STILL OUT ON THIS TOPIC. MANY OF THE DRIVERS OF RECENT INFLATION READINGS CAN BE DIRECTLY TIED TO SUPPLY DISTRUPTIONS AND QUICKER THAN EXPECTED RECOVERIES IN DEMAND BROUGH ABOUT BY THE RAPID REBOUND FROM THE ACCOMPANYING RECESSION. WE EXPECT SUPPLY CHAIN ISSUES TO EASE OVER THE NEXT SIX TO 12 MONTHS RELIEVING SOME OF PRICING STRESS IN THE SYSTEM. WHAT REALLY MATTERS FROM A LONG-TERM PERSPECTIVE IS THE LEVEL OF INFLATION EXPECTATIONS AMONG CONSUMERS AND BUSINESS OWNERS. THOSE LEVELS HAVE RISEN SO FAR THIS YEAR BUT ARE NOT MUCH DIFFERENT FROM WHERE THEY WERE IN THE EARLY STAGES OF THE RECOVERY FROM THE GLOBAL FINANCIAL CRISIS A DECADE AGO. THE KEY THINGS WE’RE WATCHING FOR SIGNS OF HOW SEVERE AND ENDURING A PROBLEM INFATION COULD BE ARE WAGE GROWTH AND THE ONGOING LEVEL OF FISCAL AND MONETARY STIMULUS PUMPED INTO THE ECONOMY BY THE FEDERAL GOVERNMENT AND FEDERAL RESERVE. IF CONSUMERS EXPECT INFLATION TO RISE MATERIALLY AND STICK AROUND, THEN THEY WILL BEGIN TO DEMAND HIGHER WAGES WHICH COULD BEGIN A VICIOUS CYCLE THAT DRIVES INFLATION HIGHER FOR LONGER. SIMILARLY, IF THE POLICY DECISIONS IN DC CONTINUE TO PUMP HIGH LEVELS OF GOVERNMENT SPENDING INTO THE ECONOMY, MAINTAIN NEAR-ZERO INTEREST RATES AND HIGH LEVELS OF LIQUIDITY INJECTIONS INTO THE ECONOMY THROUGH FED BOND PURCHASES, DEMAND COULD OVERWHELM PRODUCTIVE CAPACITY AND MAKE INFLATION A MORE SERIOUS PROBLEM. OUR PERSPECTIVE IS THAT WE ARE LIKELY TO BE WELL INTO 2022 BEFORE WE HAVE DEFINITIVE ANSWERS ON THESE ISSUES. WE HAVE MAINTAINED AN APPROPRIATE LEVEL OF CAUTION IN OUR PORTFOLIOS. THIS INCLUDES A CONTINUED CONCENTRATION ON THE STOCKS OF HIGH-QUALITY COMPANIES THAT SHOULD HOLD UP WELL NO MATTER THE ECONOMIC ENVIRONMENT AND A FOCUS ON SHORT TO INTERMEDIATE TERM BONDS THAT ARE LESS EXPOSED TO PRICE PRESSURE FROM HIGHER INTEREST RATES.

PLEASE REACH OUT TO YOUR FIRST AMERICAN BANK WEALTH MANAGEMENT ADVISOR IF YOU HAVE QUESTIONS ABOUT YOUR PORTFOLIO.

AND THAT’S INVESTMENT INSIGHTS WITH FIRST AMERICAN BANK. WE’LL BE BACK HERE NEXT MONTH, BUT IN THE MEANTIME, YOU CAN FOLLOW US ON SOCIAL MEDIA @FIRSTAMBANK.

THANKS FOR TUNING IN.