- US Stocks. Despite rising concerns over the delta variant, peaking economic growth and still-simmering inflation pressures, US equities had their best month since April. Signs of strong corporate earnings, and greater clarity from the Fed on its tapering plans, propelled stocks to several record highs during August.
- On the Virus Front. As we continue to play defense against Covid, the evolution of the delta variant has become an unwelcome surprise. In just a few months from its initial appearance, this particular strain has spread to most areas of the globe, and has become the dominant variant in more than a dozen countries. According to data from CDC, Delta is now responsible for 99% of new Covid-19 cases reported in the US. In response, a number of countries have announced booster programs to deliver third doses to their populations.
- Economic Impact. The rise of the delta variant has started to hit economic data from August, particularly the pace of hiring. So far, the markets and the economy are absorbing the impact relatively well. Even though cases and hospitalizations in some parts of the country rival or even exceed levels reached in 2020, the corresponding economic impact has been far less severe. Society in general is far more prepared to contend with cases than it was a year ago, and our collective knowledge is helping life proceed as normally as possible.
- Jackson Hole. The stock market has rebounded sharply from its March 2020 lows, thanks in large part to the trillions of dollars in stimulus aid from the Fed. From the latest Jackson Hole Symposium, there appears to be broad agreement among FMOC members on the need to reduce the Fed’s pace of asset purchases, but opinions on size and timing for the start of tapering diverge. We will now turn to the Fed’s September meeting for further clarity on the central bank’s views on the jobs market, inflation expectations, and tapering timeline.
- Inflation. Supply-side bottlenecks and a tight labor market are leading to higher consumer and business prices. Uncertainty persists on whether the inflation uptick is transitory in nature, or more permanent. Beneath the surface, core CPI fell marginally last month, and pressure from a number of areas, such as used cars, which have driven inflation in recent months, appears to be softening. On the other hand, thanks to the labor situation, wages continue to go from strength to strength. Energy prices remain elevated, as well.
- Market Outlook. Despite the growing impact on consumer confidence from Covid-19 delta variant, the stock market has been resilient enough to remain in range of new highs. The cyclical-led “reopening” trade has softened, though, and we believe the economy has lost some momentum from supply chain problems, most notably from semiconductor shortages, which have affected auto production in particular. Meanwhile, we continue to pay close attention to the Federal Reserve’s plans for tapering their bond purchases and, eventually, moving to boost interest rates. Changes to the tax code are in the offing, as well, and will likely be a headwind for investors in 2022. On a positive note, the current challenges with supply chains may have the effect of stretching out the current recovery, as consumer demand gets fulfilled over a longer time frame.
Christopher Lai
Senior Portfolio Manager
09/13/2021
