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July - Market Commentary

Greetings from your team at Benchmark Financial!

We trust everyone is enjoying summer days with friends and family and hope this letter provides some context to the economy, markets and your financial life. 

COVID-19 

At its peak in January of 2021, new COVID-19 cases in the U.S. per day was ~250,000 which resulted in roughly 3,000 deaths. Since the start of June however, the U.S. is seeing roughly 11,000 new cases per day and 300 deaths. Prevention, herd-immunity, improved treatment, and vaccinations are all contributing to the country’s vastly improving data over the last six months. As of June 30th, 154M Americans have been fully vaccinated which equates to ~46% of the population. The high-risk cohort of those over 65 years old have a vaccination rate of 77.8%. [1]

As a result, COVID-19 protocols have been relaxed on a state-by-state basis. Outside of the U.S., the Delta variant has driven new lockdowns in Australia, Bangladesh, Malaysia while Hong Kong has canceled flights to the U.K. Given vaccination rates are relatively higher in the U.S. than emerging economies, we would not anticipate seeing similar lockdowns occur again in the U.S. like we saw in 2020. 

Growth

U.S. economic growth in the first half of 2021 has been nothing short of robust with the Institute for Supply Chain Management (ISM) manufacturing index north of 60.0 (>50 is growth, <50 is decline) for several straight months. The ISM’s service index reached 64.0 in May; its highest recording over the last three decades as Americans return to shops, restaurants, hotels, and airports for travel. The more forward-looking New Orders component of both indices remains robust as well suggesting strong demand continues through early summer. 

According to Bank of America, U.S. citizens have amassed excess savings of $2.3T since the COVID-19 pandemic began which could prolong the current growth upcycle. [2] Furthermore, unemployment levels still reflect a weak economy, but ADP reported the U.S. added 692,000 jobs in June. According to ADP, “while payrolls are still 7M short of pre-COVID-19 levels, job gains have totaled about 3M since the beginning of 2021.” [3] Improving manufacturing and service demand, combined with consumer dry powder, could support U.S. economic activity while the employment picture slowly finds a foothold and normalizes over the next two years. 

Inflation

There may be some soft patches in the economy arising as homebuyer confidence has fallen sharply to near record lows and mortgage applications for the month of June fell to pre-COVID lows. This is a result of high existing home prices created by low inventory and sparse new construction activity. [4] Inflation, however, is not just apparent in housing; it is pervasive throughout most sectors of the economy. Numerous consumer goods companies have announced price increases to offset higher input costs: steel is surging, used car prices reflect record highs, while gasoline is up 63.2% over the last six months.[5] The combination of base effects, improving demand, supply-chain disruptions, capacity outages, and federal stimulus mechanisms are likely contributors to the current inflationary regime. 

Policy

Watching or reading mainstream financial news, you will undoubtedly learn about the “transitory” debate in terms of inflation. Are rising and higher prices here to stay or will the trends revert to a more normal 2%-ish level? The Federal Reserve’s official stance (right now) is that inflation is indeed transitory, thus it is imprudent to tighten monetary policy currently with the U.S. still struggling with high unemployment. The Federal Reserve continues to print $120B per month in mortgage-backed securities and U.S. Treasuries. 

Mixed signals arise between economic data, the Federal Reserve’s official policy vs. rhetoric, and market prices. Consensus does seem to be building that Chairman Powell is taking the right course of action with continued easy monetary policy to combat a post-pandemic economy while being patient on data to confirm/deny how severe inflation is. 

Outlook

Strong growth and inflation, coupled with accommodative fiscal and monetary policy, continue to support equity prices with the S&P 500 +14.4% year-to-date (as of this writing.) Relatively small market capitalization has been a winning factor year-to-date with the S&P Small-Cap ETF +15.8% and S&P Mid-Cap ETF +15.2% as earnings have improved relatively more compared with large capitalization. Sectors that benefit most from inflation such as Energy and Materials have produced strong results as well with Technology improving significantly over the last two months. [6]

Similar to our previous months’ commentary, we continue our positive outlook on equities in the near-term based on still improving U.S. fundamentals. With the labor market far away from normal, we believe there is significant longevity in the current economic cycle. Of course, there will undoubtedly be bumps along the way with upcoming changes in monetary policy. 

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 clientservices@benchmarkfinancial.info. Please visit our website at www.benchmarkfinancial.info  for more information on our planning services.    

Sincerely,

Benchmark Financial

1 https://covid.cdc.gov/covid-data-tracker/#trends_dailytrendscases 

2 https://www.zerohedge.com/markets/why-fed-dead-wrong-inflation-americans-have-35-trillion-savings-sunny-day 

3 www.adpemploymentreport.com 

4 https://www.zerohedge.com/personal-finance/mortgage-apps-crash-pre-covid-lows-homebuyer-confidence-collapses 

5 https://app.koyfin.com/cmty

6  https://app.koyfin.com/charts/gm/id-5rg2y9 

 

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