- The bull market continues, with S&P 500 now up for the seventh straight month in August. Stocks continue to hit new all-time highs and have gained 20% year-to-date. This has been the best start through August since 1997 and the sixth best since 1950. Looking at the 10 best starts ever, the market was higher the rest of the year 8 times.
- Most all major global indices were up as well on the month despite a continued increase in Covid cases.
- The primary driver of returns was another quarter of stellar earnings. 86% of S&P 500 companies beat their consensus earnings estimate in Q2, which is the highest ever recorded. Most companies’ guidance for Q3 were positive as well, signaling that the earnings growth is expected to continue.
- Many members of the Federal Reserve made comments earlier in the month that tapering of its monthly bond purchases, currently $120 billion, could begin immediately. However, Fed Chairman Powell indicated at Jackson Hole that the unemployment is still too high and that even when they begin tapering, that does not mean that interest rates will be raised anytime soon.
Why It Could Keep Going Higher
- There are still 6 million Americans that remain unemployed.
- Consumers have loads of excess savings to spend.
- Businesses have a lot of inventory to build back up.
- Additional stimulus.
- Covid cases have been rising dramatically. It is yet to be seen how the world will react to this but of course it has the possibility to significantly slow down the economic recovery.
- If inflation continued at its current rate, the Fed would be forced to raise rates, which in turn is designed to slow down an over-heating economy. However, our belief is that much of the inflation we are seeing is transitory and will self-correct as supply chain dynamics return to normal.
- Consumer prices increased for the fifth straight month according to the July CPI which increased 0.5% month over month. However, it showed signs that the rate of increase is slowing.
- The July jobs report added 943,000 jobs and the U.S. unemployment rate has continued to decline. The end of the remaining extended unemployment benefits might further speed this recovery.
- Retail sales declined in July more than expected.
What We Are Doing
We have continued to maintain a well-diversified allocation. We are still overweight equities and underweight fixed income, but have reduced some of that overweight. We’re still investing in areas that should benefit from the world returning to normal, as well as potentially higher interest rates, such as industrials, banks and value. However, we believe longer term trends will continue to favor technology that we added to during their recent sell off.
We are watching the investing implications from further regulatory actions out of China closely but see the recent sell-off as a buying opportunity. With interest rates anticipated to rise over the next couple of years, we plan to maintain our underweight to investment grade fixed income and overweight to high yield. Going forward we continue to favor high yield, preferred stocks, private debt and private real estate as a way to create income.