- Economic metrics indicate that the pace of the recovery is slowing. Growth rates likely reached their peak in the 2nd quarter of 2021.
- Although market valuations remain considerably elevated above their historic average, corporate profits and margins year-to-date have been historically robust.
- It is widely expected that the Federal Reserve will begin to ‘taper’ the volume of their monthly bond purchases before year-end.
- The transition from peak growth rates and peak central bank support increases the likelihood we will experience elevated levels of financial market volatility in the months to come.
- The COVID pandemic and governments’ response to it will continue to be a persistent and significant variable in determining the strength of the economy going forward.
We hope you and your family are remaining healthy and enjoying a relaxing summer. As we see the suffering and desperation in Afghanistan, our hearts go out to the families of our fallen and injured soldiers and to the Afghans who have lost loved ones. In terms of the economy, we do not expect the current events in Afghanistan to materially impact the financial markets.
Although the pace of our resurging economy has slowed, stock markets in developed economies have remained strong. The impressive strength in the equity markets of stocks and real estate have, to a degree, been driven by the lack of attractive investment alternatives within this low-interest rate world.
The U. S. Federal Reserve Bank’s response to the COVID pandemic outbreak in March of 2020 was exceptional. They moved quickly to implement a decisive strategy that provided essential liquidity to our entire global economy. Most importantly, they inspired confidence by communicating their commitment to “do whatever it takes” to help our economy regain its footing and transition from recovery into sustained expansion. In addition to our central bank’s massive monetary stimulus, around $10 Trillion of Corona-virus related fiscal relief programs were initiated by the Trump and Biden administrations. This unprecedented response, along with viable vaccines, has encouraged optimism and increased expectations for further growth in the months ahead.
The robust stock market returns over the last 17 months have raised many questions from investors whether today’s markets are in a bubble similar to the 1999-2000 period. Although valuations today remain at historically high levels, corporate earnings have increased substantially and Price/Earnings ratios have actually moved lower in 2021. That said, earnings growth rates likely peaked in the second quarter of this year. This deceleration in the rate of growth, combined with the likelihood that monetary and fiscal stimulus will be throttled back over the next year, increases the likelihood we will experience elevated levels of financial market volatility. Most Wall Street analysts expect our Federal Reserve to announce they will begin “tapering” the volume of bonds they are buying monthly before the end of 2021. “Tapering” can rattle the markets, at least temporarily, by causing interest rates to rise.
If Congress does pass an expected tax increase in 2021, we believe it is unlikely the new law will become retroactively effective to the beginning of the year.
COVID continues to be a wild card. Although the Delta variant has prompted a resurgence in new cases, it remains to be seen how governments will respond and whether they will reinstitute further lockdowns. The ongoing rollout of vaccines, and now booster shots, increase the likelihood the current economic recovery will continue.
We remain committed to keeping you informed. Please let us know if you have any questions or concerns regarding financial planning, investments, or the financial markets.