By Tim Courtney, Chief Investment Officer

Over the past year and a half, market investors have experienced some of the worst and best performance in market history. In March 2020, it experienced a deep plunge caused by the onset of the COVID-19 pandemic, but rebounded and has since soared. The first half of 2021 finished with all three major benchmarks up by double-digit percentages.¹ They have since continued to reach all-time highs throughout the summer.

Along with this, companies have reported record earnings and many households have become flush with cash due to savings, government stimulus and home refinancings. This has caused consumer spending and GDP growth to swell in the first half of the year.²

However, these swings have not been normal and we may be reaching the part of the rollercoaster where the track begins to level out. We’ve already seen early signs of this over the last several weeks.

At the start of the pandemic, the economy essentially shut down and stayed closed until it was revitalized months later. But the economy is too complicated to simply turn off and on again without any consequences. For the past year or so, the market has focused on the reopening, stimulus and impressive earnings with very little reaction to bad news. Now, the market seems to be more sensitive to potential headwinds:

• While the stimulus and the Fed’s bond buying helped kickstart the economy, the country must now deal with the debt it has incurred from these programs. In July 2021, U.S. debt sat at about $28.43 trillion, an increase of $1.9 trillion from June 2020.³ This debt will have to be reconciled and paid for with expected tax increases.
• The housing boom and car shortages seen earlier in the year are starting to tail off and ease, respectively, but there are still shortages in areas that no one could have expected. Even the publishing industry is struggling to print books because it can’t find paper suppliers. This situation affects other companies all along the production chain. Such shortages will start to have an impact on earnings.
• Originally seen as transitory, inflation reached much higher levels than what the Fed originally predicted. According to recent Labor Department data, the consumer price index (CPI) jumped 0.3% in August and 5.3% from the same month last year.⁴ This is slightly cooler than expected, though these levels are still well above historical averages.
• While the economy is recovering, we’re not out of the woods yet regarding the pandemic. The delta variant, as well as other variants, are still spreading. It’s hard to predict the extent of the pandemic’s impact on consumer spending and market performance, but airlines and other travel companies have noted that it is seeing more cancellations that are impacting near-term earnings in 2021.

Overall, we believe there is enough growth and earnings momentum to carry well into 2022. However, we also think the market will become more sensitive to economic headwinds than it has been over the last 12 months. If you have any questions, please contact your Exencial advisor.

Sources:

1. Nasdaq (6/30/21) — Stock markets post a strong first half of 2021
2. Fortune (7/29/21) — U.S. economy is bigger than it was pre-COVID after quarter of booming consumer spending
3. Statistica (8/10/21) — Public debt of the United States of America from July 2020 to July 2021, by month
4. The Wall Street Journal (9/14/21) — Inflation eased in August, though prices stayed high

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index

that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock

Exchange and the NASDAQ. The DJIA is the second oldest U.S. market index; the first was

the Dow Jones Transportation Average. The DJIA was designed to serve as a proxy for the

health of the broader U.S. economy.

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. Nasdaq is a global electronic marketplace for buying and selling securities and was created by the National Association of Securities Dealers (NASD), which is now known as the Financial Industry Regulatory Authority (FINRA). The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

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