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Normal Times or a New Normal?

Normal Times or a New Normal?

| July 30, 2021
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With half of 2021 now behind us, it is safe to say that economies around the world have improved.  This worldwide economic resurgence was fueled by significant economic openings and a steady, although at times slow, distribution of the vaccine.  This consequently invigorated a spring loaded and consumption-led economic boom.  With several billion vaccine doses administered worldwide an easing of the pandemic is providing a crucial step towards normalization and is stoking an epic turnaround of global GDP growth.  Additionally, a mix of easy monetary policy and generous fiscal assistance from global governments is adding more capital for consumers to inject into the system.  Not surprisingly, equity markets, especially in the US, have continued to rise steadily and are now near or at all time high valuations.  Despite a couple of minor pullbacks during the winter, all three major US benchmarks are up double-digit percentages for the first half with the Financials, Energy, Technology, and Real Estate sectors leading the way.

As governments around the world reopened their economies, consumer demand for products and services shot upward in a similar way that occurred after World War II.  At the same time, monetary and fiscal stimulus added more ammunition to the pent-up demand.  This in turn created some growing pains and threw worries of inflation into the mix.  Overall, while future inflation remains a potential and should be monitored, we think any elevated levels of pricing pressure will prove to be temporary and will moderate over time.  The simple fact is that the economy is reopening faster than expected and global supply chains are not ready for the revived and shifting consumer preferences.  The result has created spikes in the cost of service items, food, energy costs, automobiles, furniture, and just about anything needed in short supply.  As production continues to ramp up, supply problems will improve, and prices should eventually subside and drop to levels seen prior to the pandemic.  This easing of inflationary pressures appears to be already priced into the markets which are expecting inflation to be about 3.3% for the next 12 months and then fall to an average of about 2.5% in subsequent years.  If this proves true, it should be a positive for equities, as tame and under control inflation rates have historically been the sweet spot for equity valuations.

While inflationary pressures should prove to be temporary and are under the close eyes of the Federal Reserve, other risks do remain for investors to monitor.  Vaccination campaigns have helped to protect the population and bring infections under control in the US and many developed countries, but many areas of the world are still behind the vaccination curve and find themselves continuing to battle high positive case counts.  Also, as new virus variants emerge, disruptions in reopening efforts and a return to certain restrictions might hinder full economic recovery.  Political and regulatory changes might also play a role in future market volatility.   In the US and other foreign countries, policy and political risk are on the rise.  Specific changes to the US tax code and a move towards more government regulatory intervention could change the landscape for corporate profits and growth.  Finally, after record setting monetary and fiscal support flooding the economic landscape, a period of government pullback may be on the horizon.  In fact, there is great anticipation that the Federal Reserve will soon announce when its quantitative easing (QE) program will begin to taper off.  With lower global liquidity and consumer stimulus waning, future global investment analysis might become more challenging.

Even with some of the risks outlined above, we still feel the remainder of the year will be productive.  The US economy appears to now be entering into the Mid business cycle phase which is defined by peaking growth, strong credit growth, neutral policy, and sustainable inventories.  When looking at economic momentum and corporate earnings growth, things should moderate some, but activity should remain fairly robust.  It is also important to note that the Mid-cycle phase tends to be the longest phase of the business cycle averaging nearly four years.  Yes, market valuations are quite elevated, particularly in the US, but a healthier consumer and an increase in capital spending are reasons that long-term investors would be prudent to take advantage of future market pullbacks to add to their portfolios. 

And many corporations agree.  After a year-long absence, companies have begun share repurchases at a significant level.  Nearly $400 billion in buybacks have been announced by S&P 500 companies’ year to date.  As the world emerges one area at a time from the pandemic, investment opportunities should become available for alert investors.  Sector and asset class rotation will continue and will reward properly balanced diversified portfolios.      



Our mission is to grow our portfolios while minimizing risk.  This is why disciplined risk management continues to be a major part of our portfolio construction.  At the same time, we always look to embrace opportunities that arise during times of market volatility to accumulate high quality stocks designed to meet our client’s long-term financial goals.  In addition, our successful conservative option strategies help to hedge our positions and add additional investment income.

From all of us at Tellone Financial, we wish you a safe and enjoyable summer.

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