Economic Flash: Some Resistance Will Not End Recovery
August 2021
US Economy: Good, not great.
US 2nd quarter GDP growth was robust but not as strong as expected, coming in at 6.5% annualized vs. 8.4% anticipated. While consumer spending and confidence remain strong, higher claims for unemployment, a softer real estate market and a resurgence of Covid due to the Delta variant, suggest a drawn-out recovery.
US Stocks: New highs not for all.
US large-cap stocks rose on strong earnings growth, while small-cap stocks fell. Smaller companies have disproportionately struggled with local Covid restrictions, supply-chain shortages and short-term inflationary pressures, all of which have contributed to a slower earnings recovery.
Foreign Stocks: China roils markets.
While foreign developed markets posted modest returns, emerging markets fell, with China (-13.8%) leading the drop. New restrictions imposed by the Chinese government on the country’s leading technology companies and the for-profit education sector, among others, pose significant headwinds for corporate profits in China and elsewhere.
Fixed Income: Rates fall again.
The yield on 10-year US Treasuries fell for the 3rd straight month, dipping below 1.2%, as investors focused more on the possibility of an economic slowdown due to the Delta variant rather than rising inflation. Meanwhile, the Federal Reserve continues to maintain its target interest rate near zero.
Real Assets: Real estate leads.
REITs and real estate were among top performers for the 2nd consecutive month as more consumers ventured out to shop at brick-and-mortar businesses and demand for office space is picking up in many markets; in New York and Los Angeles, the office market is nearly back to pre-pandemic levels (per the VTS Office Demand Index).
Alternatives: Private equity roars.
Private equity deal-making set a record in the first half of 2021, boosted by rising valuations and low-cost funding. While many private market investments now look just as expensive as their public market counterparts, we believe select private market opportunities can enhance diversification and risk-adjusted return.
Equities Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 2.4% | 18.0% | 36.4% |
| U.S. Small Cap | (3.6%) | 13.3% | 51.9% |
| U.S. Growth | 2.8% | 15.9% | 36.8% |
| U.S. Value | 0.5% | 18.2% | 40.7% |
| Int’l Developed | 0.8% | 9.6% | 30.3% |
| Emerging Markets | (6.7%) | 0.2% | 20.6% |
Fixed Income Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 1.1% | (0.5%) | (0.7%) |
| TIPS | 2.7% | 4.4% | 6.9% |
| U.S. High Yield | 0.4% | 4.1% | 10.7% |
| Int’l Developed | 1.9% | (4.4%) | (0.8%) |
| Emerging Markets | 0.6% | (0.4%) | 6.1% |
| Tax-Exempt | |||
| Intermediate Munis | 0.6% | 0.9% | 1.8% |
| Munis Broad Mkt | 0.7% | 2.1% | 3.8% |
Non-Traditional Assets Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 1.8% | 23.4% | 40.3% |
| REITs | 4.4% | 26.6% | 33.5% |
| Infrastructure | 1.0% | 6.4% | 20.7% |
| Hedge Funds | |||
| Absolute Return | (0.4%) | 2.1% | 5.2% |
| Overall HF Market | (0.4%) | 3.4% | 10.1% |
| Managed Futures | 0.6% | 7.2% | 10.8% |
Economic Indicators
| JUL-21 | JAN-21 | JUL-20 | |
|---|---|---|---|
| Equity Volatility | 18.2 | 33.1 | 24.5 |
| Implied Inflation | 2.4% | 2.1% | 1.6% |
| Gold Spot $/OZ | $1814 | $1848 | $1976 |
| Oil ($/BBL) | $76 | $56 | $43 |
| U.S. Dollar Index | 113.7 | 112.2 | 117.4 |
Our Take
We foresee the US economy expanding briskly through this year and into 2022. While the fast-spreading Delta variant of Covid-19 will pose challenges, we think those are likely to be manageable and won’t threaten ongoing economic recovery. US consumer spending and confidence are up, and both the Fed and the US government continue to provide massive support to the economy. A bipartisan $1 trillion infrastructure bill making its way through the US Senate this week, if approved, will help bolster growth. Meanwhile, the Fed has shown no indication it will back off from its accommodative stance, including $120 billion a month in bond purchases.
In terms of new risks, corporate earnings growth is entering a period when comparisons will become more difficult. So far, earnings are up dramatically relative to last year, when the height of the pandemic took its toll. But “base effects” that have made for easy comparisons will start to dissipate in 3rd quarter 2021. With the year-over year comparisons more difficult, investors are likely to be more discerning about individual companies’ longer-term growth prospects.
What We’re Doing
The foundation of the LNWM approach is our strategic asset allocations designed to weather a wide range of market and economic possibilities over a full market cycle. All along, we evaluate whether our current portfolios appropriately account for potential risks, including a rise in inflation, as well as new opportunities. As it stands, we believe we have the right positioning today, including our investments in real assets, which we think can buffer against rising inflation as well as market turbulence.
Within our investment platform, over the last several years, we have expanded our sustainable investing capabilities to include new analytical tools and a full spectrum of strategies so client portfolios can target both financial objectives and objectives related to the environmental and social issues they care about. We are especially excited about two current initiatives: testing which analytical tools provide clients the most insight into how their portfolio is aligned – or not – with their areas of concern; and designing new investment solutions focused on specific environmental and social concerns while targeting competitive financial performance. We are making steady progress on both and will report on new developments.
