Forward Sales and Earnings Remain Strong
Posted on October 25, 2021
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The third quarter of 2021 was another profitable quarter for U.S. equity markets overall. Interestingly, markets largely ignored a nationwide resurgence in COVID-19 cases, which was felt rather acutely here in Florida as hospital systems were once again put under tremendous strains. However, the overall sense of disregard does make some sense. With a large swath of the population now vaccinated, consumers (and by extension investors) seemed willing to resume life as normal and avoid the sorts of lockdowns we experienced last year. The lockdowns were deemed medically necessary, but they nevertheless zapped economic growth and consumer confidence. While the Delta variant of COVID-19 undoubtedly tested our collective resolve, it is heartening to see infections beginning to subside in areas hardest hit just a few months ago and providing some hope for other geographies that have yet to be affected.
We experienced another solid cycle of corporate earnings results during the second quarter. Moreover, forward sales and earnings estimates remain quite strong overall. Those concerned about the U.S. economy are focusing mostly on supply-chain issues, believed to be somewhat temporary, meaning there is less concern about weakening consumer demand – the ultimate driver of economic growth. Coupled with excessively accommodative monetary and fiscal policies, it is understandable why investors have been willing to purchase stocks at higher and higher valuations. While we continue to believe that economic activity will remain robust through the end of this year and into next, we also understand capital markets look forward, and some amount of future optimism is being priced into stocks today, particularly here in the U.S. For that reason, we are being mindful in our valuation work to safeguard against systematically overpaying for the investments we purchase on behalf of our clients.
The fixed income (bond) markets seem to be exhibiting a more cautious tenor. Interest rates remain rather low despite annualized inflation – as measured by the Consumer Price Index (CPI) – tracking upwards of 4%, even after removing the effects of food and energy. The fact that interest rates are not rising commensurate with inflation indicates there is some concern among investors that economic growth will not remain as robust going forward. While we still expect no change in the Federal Funds rate before late 2022 or early 2023, we do anticipate that the Federal Reserve Board will reduce its bond purchase program later this year, which would be the first attempt to tighten the money supply since the beginning of the pandemic. However, if economic growth begins to wane in the months ahead, the Fed may decide to delay any change in current policy. Regardless, we will be watching closely to see how the Fed navigates these interesting conditions given its implications for asset prices and market volatility.
It also seems likely that a new fiscal spending package along with some changes to existing tax law are forthcoming. Any incremental government spending will impact economic growth positively in the short term, while tax law changes affect corporations and individuals much differently depending on a variety of factors. That said, our focus will remain on sourcing and managing high-quality investments for our clients, while also considering the associated risks. As always, we do this best by understanding clients’ individual goals and constraints and building a portfolio that best suits those unique circumstances.
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