By: Linda S. Parenti, CFA - Chief Investment Strategist
Typically, the month of August has not been friendly to equity investors. Even though we have seen eight new all-time closing highs for the S&P 500 during August alone, the daily give and take has left the index flat month-to-date. Still, the number of record closing highs have been quite impressive this year. Last Monday’s closing high was the 49th year-to-date. With no significant pullbacks, this leaves the index up 18.4% on a total return basis as of yesterday’s close.
Earnings season is winding down with only 23 of the S&P 500 companies yet to report their results for the second quarter. Like the first quarter, most reports have exceeded expectations. Not surprisingly, when compared to the second quarter of 2020, companies are showing exceptional growth in both their sales and profits. Positive guidance from managements has analysts continuing to raise expectations for future quarters. Higher earnings estimates help valuations from becoming overheated, which allows prices to continue rising.
It is said that stocks climb a wall of worry. This currently includes the Delta variant’s potential to slow the global economic recovery. Minutes from the most recent Federal Open Market Committee meeting indicate the Fed believes the economy is making progress, but not yet ready for them to begin reducing their supportive measures. On the other hand, analysts and economists have voiced concern that continuing to maintain such an easy monetary policy could keep inflation higher than desirable. Following the large increase in post-pandemic spending earlier in the year, there are signs that growth may have peaked. While still showing overall improvement, more economic readings have started to come in below expectations. If that trend continues, the Fed’s resolve to remain accommodative for a little longer might be justified.
There is also apprehension that the newest $3.5 trillion spending bill waiting for a vote in the House will add too much to our country’s already expansive debt burden. While fiscal support continues to be needed for the recovery, there is a point when leveraged spending hinders, rather than helps, economic growth. With nearly $6 trillion in pandemic related spending approved already and a current U.S. debt to GDP ratio of 127%, many wonder how much more debt the country can handle. Since there is no clear answer to that important question, it is helpful to consider measures of sustainability. One favorable factor is the cost of borrowing for the U.S. continues to be very low. Interest rates offered on our U.S. Treasuries have been falling for decades. This has kept our federal interest payments low as a percentage of total federal spending. Another way of weighing our growing debt burden is to look at the rate of growth in GDP. The higher our rate of economic growth over the rate of interest we pay, the more manageable the debt burden. Currently, the yield for the 10-year U.S. Treasury hovers around 1.25%. GDP growth is forecast to be close to 6% for 2021 and 3.5% for 2022, but then move lower in following years. Though our debt load appears manageable, it is prudent that lawmakers move forward cautiously.
For now, both monetary and fiscal policy look to be very accommodative for the foreseeable future. Consumers, corporations, and investors are flush with cash. Not dismissing the ever-present possibility of a pullback, this continues to be a positive environment for equities.
Linda S. Parenti, CFA
Chief Investment Strategist
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.