August 2021 - Market Commentary
We hope this update finds you and your loved ones safe and healthy.
The most recent data as of July 28th indicates that the number of daily COVID-19 cases in the U.S. is 86,058 which compares to a recent low of 11,612 daily cases in late-June due to the spread of the Delta variant, which represents 83.2% of recent cases. According to the CDC, the Delta variant is significantly more transmissible than the original strain and consensus on severity appears to be changing by the day. As a result, mask mandates were re-imposed across the country last week and Dr. Fauci stated that both unvaccinated and vaccinated individuals can transmit the new strain. That said, in the UK, a recent J.P. Morgan report indicates COVID cases have more than halved in ten days suggesting the Delta incidence is much milder than anticipated. 
Since March, we have been writing about peak U.S. growth acceleration arriving mid-summer ’21. Recent data suggests this is coming to fruition. Markit’s composite gauge of economic activity for the month of June was 59.7 (>50 is growth, <50 is decline) compared to 63.7 in the month of May. The composite is comprised of 1.) manufacturing data which continues to accelerate at 63.1 vs. 62.1 in the prior month and 2.) services data which fell to 59.8 from 64.6 in the previous month. Additionally, U.S. retail sales registered a robust +18.0% year-over-year growth rate in June, but down from the +27.8% growth rate in May.  While the U.S. economy is still growing, the rate of change of growth is showing signs of slowing. Current security prices reflect expectations about the future and the recent declines in Small Cap stock prices and the improvement of Fixed Income prices (relative to year-to-date trends) show market participants may be turning more cautious on the intermediate-term growth outlook, compounded by the Delta strain acting as a new negative catalyst.
Inflation data, both from the consumer and producer’s side, continues to surprise to the upside. For example, the Producer’s Price Index registered +7.3% year-on-year in June compared to +6.8% expectations and +6.6% in the month of May. The Federal Reserve’s key inflation indicator, Core Personal Consumption Expenditures (PCE), printed +3.5% year-on-year, the highest level since 1991. 
Improving demand is a primary driver of higher prices, but supply constraints in terms of raw materials, labor, and transportation continue to create bottlenecks across the U.S. supply-chain and cause upward pressure on prices. The on-going semiconductor shortage has caused nightmares for the U.S. automobile manufacturing base which drove used car prices to historic highs. While lumber and corn prices have fallen sharply over the last thirty days after a historic upward move, other commodities such as steel, aluminum, copper, and gasoline have been resilient and all registered +5 to +15% price moves over the last month. 
The official policy of the Federal Reserve has remained unchanged over the past month with the continuation of $120B/month of asset purchases with no plans to increase interest rates in the immediate term. 
What has shifted is Chairman Powell’s tone regarding inflation and the cadence around balance sheet reductions. In the most recent meeting, the Chairman admitted inflation data was well above expectations but still “transitory.”
The Federal Reserve expects the rate of inflation growth to slow but not reverse. One of our favorite financial pundits described it perfectly; “Your weight gain will be transitory. But you will remain fat afterwards.” Furthermore, the Federal Reserve board has begun discussions on scaling back the $120B/month of asset purchases, which is expected to occur over the next few months.  Interest rate increases would be phase two of tightening monetary policy, but the board still sees unemployment significantly too high to have increases on their radar.
Our views on financial markets have been positive for some time predicated on 1.) strong growth 2.) modest inflation and 3.) easy monetary and fiscal policy, which has resulted in low-teens price appreciation across our client’s investment strategies on a year-to-date basis. With the potential for economic growth to begin decelerating and the Federal Reserve considering tightening policy, there should be some short-term fluctuation in the equity markets. That said, most portfolios are diversified across multiple equity sectors and hold fixed income and cash to provide a ballast when equity markets underperform.
As always, if you have any questions or would like to discuss your accounts or financial situation further, please call your advisor directly or email us at firstname.lastname@example.org. Please visit our website at www.benchmarkfinancial.info for more information on our planning services.