Hello friends, welcome to the 2021 August Market Outlook. The dog days of summer are upon us, and hopefully you’re reading this on a beach, lake or campsite, so let’s jump right in and get you back on cruise control. The summer lull we’ve been writing about continues to play out. Stocks have completed a record 6 month rise, and US Real GDP hit a new high in the 2nd quarter, surpassing the prior high from Q4 2019 and completing the V-shaped recovery that was proposed last summer. We currently have earnings season underway, and so far so good. Not surprising, big tech has continued to outperform. In their most recent earnings report, the four big players continue to stand out and their annual earnings have hit historical numbers- Apple $347BN, Microsoft $168 BN, Google $197bn and Amazon $443 BN. The outlier for stock performance was Amazon, which slid after the report due to missing aggressive growth estimates. They were expected to earn $115.2 billion for the quarter but only reached $113 billion. Could we be hitting a potential weak period for big tech? After all, growth in numbers and daily users are slowly dropping, and that could be due to the reopening and people opting to gather in person or spend time outdoors. A lot will come into play here, including the Delta variant, Consumer spending (which has slowly dropped lately) and the potential for a rate hike from the Federal Reserve. Overall, it’s been a tremendous year for stocks, and an amazing 6 month run. We do want to highlight that we are entering a seasonal period of weakness. August is historically a bad month for stocks, and the pullback tends to bottom in September/October. We’ll see if the bulls are able to remain in control. But those who have been reading past issues know, we’ve been forecasting a heightened period of volatility for the end of the year.
The Delta variant continues to be an issue across the globe. The good news is that the death and hospitalization rates aren’t following the infection rates. And some of the hardest hit countries with this new variant are turning a page, India in particular. In the U.S., the variant is just starting to pick up its infection rate. At its peak in January, the UK was averaging over 1,200 deaths per day. The current 7-day average of covid-19 deaths: 72, which is 94% lower than the January high. There could be a potential for new mask mandates around the country, but we don’t foresee another lockdown occurring or disruption to the current economic environment. If anything, the vaccines are doing what they’re supposed to and we’re getting that much closer to herd immunity.
Now, to address the biggest topic for the market, the Federal Reserve which has received plenty of attention lately, in particular if Fed Chair Powell will be nominated for another four-year term. We won’t speculate, as there are plenty of politics involved. His likely successor, should he be removed from office, would be Lael Brainard. We urge investors to pay heed to her words. What we do believe is occurring, with much more certainty, is the Fed preparing for a potential rate hike. The reasons are multiple: Wage growth has picked up, employment has picked up, housing prices increased 16.6% over the last year (the highest increase ever reported) and then you have the Personal Consumption Expenditures Index (the Fed’s preferred measure of inflation) exploding higher. By the way, it’s at the highest it’s been since 1991. Now, we don’t expect a massive move in rates, but we do believe the Fed is behind the eight-ball and potentially has to play catch-up. Don’t forget, a rise in rates will provide them more ammunition for when the next downturn occurs.
Last but not least, let’s discuss China and what’s been occurring lately. There’s been trouble arising for Chinese companies listed on U.S. exchanges. This isn’t the first time this has occurred, US investors who purchased China Mobile were sent to the woodshed last January when the company was delisted by the New York Stock Exchange following an executive order from former President Donald Trump banning investments in companies the U.S. said had ties to China’s military. This time around, China is pushing back. They recently attacked companies like Didi (Uber of China), for-profit education companies, and even gaming companies like Tencent. There could be a number of reasons for this change. Privacy of Chinese consumers is the argument in Didi’s case. Making education cost effective and free as to allow China to grow out of their demographic challenges, and labeling gaming as potentially harmful to Chinese consumers. Although the last story has been pulled and Tencent has erased the loses caused by the story. The reason we are highlighting these structural changes to the Chinese economy is due to our bullish forecast for the region over the next decade. We still hold that belief but investors need to pay close attention to policy changes and what it can mean to their portfolios. Weakness in Chinese equities continued last week, with tech shares now in a 55% drawdown from their February high. In conclusion, it’s really important to own companies in China that are aligned with the goals and objectives with the Chinese Communist Party. For this reason, we highly encourage investors to use a manger that has “boots on the ground” in the region.
At this point we would like to wish you a terrific end to your summer. We look forward to hitting the ground running together in September and please don’t hesitate to reach out with any questions.
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