Summer Vacations Took a Back Seat to Equity Markets in August

The Federal Open Market Committee (FOMC) has not taken the summer “off”. They have merely just been standing pat on current easy money policies. They have been busy meeting regularly, holding press conferences, dinners, phone calls, and (as the latest meeting minutes indicate) have begun talking about a tapering of the $120 billion of bond purchases they continue to make each month. There is now open debate between the most Hawkish (those indicating it’s time to act soon) and Dovish (wait and see) members as to whether such action should begin this year or next. Plans for any movement on short-term interest rates above zero however, continue to be on hold until multiple changes in the seasons take place, well into next year.

The S&P 500 capped a seventh straight month of gains, ending the month 3% higher and reaching multiple new closing highs on the way to a stellar return to investors of over 21% thus far this year. Wall Street analysts are continuing to revise year-end forecasts higher to keep pace, while individual investors have added record amounts of new money into stocks over the summer. Rock solid corporate earnings have outpaced price appreciation of the market, causing price/earnings (P/E) multiples to contract. Said differently, the overall market is less expensive on a valuation basis (the amount investors pay for $1 of a company’s earnings), despite the strong gains in stock prices.

Market strength was broad-based in the month with all sectors of the S&P posting gains with the sole exception of energy stocks. Concerns about a virus spike in the U.S. potentially slowing travel (fuel consumption) and a demand slowdown out of China weighed on oil prices during the month until the recent hurricane-related supply disruptions. The technology-focused NASDAQ Composite continued to reach new highs as well during the month and not to be outdone the Dow Jones Industrial Average has found it’s footing above the 35,000 milestone.

Manufacturing orders remain strong, but output growth has weakened due to ongoing supply chain bottlenecks. Order backlogs (as shown in the chart below) are growing due to unprecedented vendor delivery delays. An increase in input costs will continue to flow through to consumers for companies with pricing power for high demand goods.

Extended unemployment benefits are coming to an end, likely to serve as a tailwind to an improving employment situation. The latest payrolls report was weaker than anticipated in terms of new jobs created but showed a modest drop in headline unemployment to 5.2%. The four-week average of Initial Jobless Claims has also reached a pandemic low.

The COVID-19 Delta variant continues to be front and center on the minds of most everyone as children head back to school. The Pfizer vaccine won full approval by the Food and Drug Administration leading some school districts, companies, and the U.S. military to implement vaccine mandates. How businesses are able to withstand the potential loss of workers and customers should additional restrictions become necessary to contain a further spread is a key question as to whether economic growth can continue at an above trend pace. Ongoing issues relating to hiring, shipping and other supply chain disruptions continue to be critical pieces of the economic puzzle we will be watching closely.

At the time of this writing our thoughts are with the families impacted by the tragic loss of life and devastating damage caused by Hurricane Ida. The economic impacts of losses to the region will take some time to adequately understand.

All eyes and ears will remain focused on the Fed in the coming weeks for signs of a pullback of long-standing monetary accommodation. Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.