Economic Flash: Too Far, Too Fast? Getting Back in Balance


September 2021

US Economy: Delta headwinds.

The economy remains on stable footing but the proliferation of Covid’s Delta variant has made a significant dent in consumer and business optimism. Previously surging air travel, hotel occupancy, and dining-out activity all slowed, while job postings and return-to-office plans have been put on hold.

US Stocks: Large stocks rally.

After a weak start, the S&P 500 gained more than 3% in August on full FDA approval of Pfizer’s Covid-19 vaccine and assurances from the Fed that monetary support will not end anytime soon. Meanwhile, small-cap stocks continued to face challenges from Covid restrictions, supply and labor shortages.

Foreign Stocks: China weighs on returns.

Foreign equities followed US markets higher, with many emerging markets performing incredibly well, especially within Europe (+4%) and Argentina (+30%), as the city of Buenos Aires was able to restructure its foreign debt. In China, restrictions on tech companies and others continued to pull down index returns (-2.5%).

Fixed Income: Rates rise.

The yield on 10-year US Treasuries rose for the first time since April, reaching 1.3%. Yields could climb higher by year-end, if the US labor market continues to recover and the Fed, as expected, starts to cut back on its bond purchases (now at $120 billion a month), which has been helping keep a lid on longer-term interest rates.

Real Assets: Infrastructure leads.

Real assets continued to lag behind the broader equity markets but infrastructure inched ahead of REITs, as electric utilities, road and railroad stocks each gained more than 3%. These sub-sectors are anticipated to benefit from the $1 trillion in new infrastructure spending likely to gain full Congressional approval in Sept.

Alternatives: Crypto roars back.

Bitcoin rose nearly 14% and Ethereum 33% during August. A variety of factors helped attract investors to this volatile marketplace: belief that cryptocurrency can be an alternate store of value in an inflationary environment; ultralow interest rates that have prompted risk-taking; and new, non-currency applications for blockchain technology.

Equities Total Return

U.S. Large Cap 3.0% 21.6% 31.1%
U.S. Small Cap 2.2% 15.8% 47.1%
U.S. Growth 3.6% 20.1% 28.8%
U.S. Value 2.0% 20.6% 37.7%
Int’l Developed 1.8% 11.6% 26.1%
Emerging Markets 2.6% 2.8% 21.1%

Fixed Income Total Return

U.S. Agg. Bond (0.2%) (0.7%) (0.1%)
TIPS (0.2%) 4.3% 5.6%
U.S. High Yield 0.5% 4.6% 10.3%
Int’l Developed (0.8%) (5.2%) (1.3%)
Emerging Markets 0.7% 0.3% 6.6%
Intermediate Munis (0.1%) 0.8% 1.7%
Munis Broad Mkt (0.4%) 1.7% 3.7%

Non-Traditional Assets Total Return

Commodities (0.3%) 23.0% 31.0%
REITs 2.1% 29.3% 36.1%
Infrastructure 1.8% 8.4% 20.9%
Hedge Funds
Absolute Return 0.1% 2.1% 4.8%
Overall HF Market 0.6% 3.9% 9.0%
Managed Futures (0.1%) 6.7% 11.7%

Economic Indicators

AUG-21 FEB-21 AUG-20
Equity Volatility 16.5 28.0 26.4
Implied Inflation 2.3% 2.2% 1.8%
Gold Spot $/OZ $1814 $1734 $1968
Oil ($/BBL) $73 $66 $45
U.S. Dollar Index 113.6 113.1 116.0

Glossary of Indices

Our Take

The end of summer typically feels like an inflection point and 2021 is no different. This year, however, as kids return to school and football stadiums fill to capacity, we face the unnerving possibility of a Covid resurgence, as US cases have steadily risen to levels not seen since January.

Economic growth is starting to be impacted by the acceleration in Covid, as evidenced by travel and restaurant data. So far, however, we think the economic impact won’t threaten ongoing recovery as consumers and businesses alike continue to spend. Full approval of the Pfizer vaccine is a significant positive, since it may induce more people to get vaccinated, as would approval of the vaccine for children under 12, which could come later this year.

Among key risks that bear watching: withdrawal of various types of government support. Extra unemployment benefits end this month; the federal eviction moratorium will not be extended; and the Fed is expected to cut back on monetary stimulus toward year-end. All this means consumers will have more reason to cut back on spending.

What We’re Doing

Last month, we talked about the foundation of our approach being our strategic asset allocation process. We are fond of saying that regardless of market environment, our portfolios are “built for this.” That does not mean that we don’t make adjustments. In fact, we regularly evaluate the risk exposures in portfolios and whether asset classes remain in proper balance as markets ebb and flow.

Given strong equity performance so far in 2021 and over the last few years, equity allocations in many portfolios are above long-term targets. Currently, on a client-by-client basis, we are looking to rebalance while keeping an eye on the tax consequences. With the prospect of higher capital gains taxes in 2022 and beyond, it may make sense to take some profits and re-align portfolios to achieve our strategic, long-term targets for risk and return.