Mid-Year Update

Michael Daudelin |
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Market Commentary

Mid-Year Update 2021

 


Mid-summer 2021, the stats show we are doing well in the fight against the pandemic. I believe the perceived threat of the virus has diminished, and people are finally willing to pursue normal life once again. One sign of this is that traffic jams on the highway are back, not so much commuting to work as many are still at least partially working from home, but travel-related. Around town, it seems like pre-pandemic levels of activity to me. However, although slight, Covid cases are picking up again, and last Thursday night’s Red Sox versus the Yankees ballgame was called off.

 

NEW YORK (CBSNewYork/AP) — The New York Yankees announced that Thursday’s series-opening game against the Boston Red Sox has been postponed due to positive COVID-19 tests within the organization. July 15, 2021

 

  

Does it mean we need to start wearing masks again? I hope not, but we’ll see. And, although the stats for the country as a whole could be better, the situation in many parts of the world is worse; in places like India, Africa, and Latin America, the pandemic is still very much a threat.

 

  Yet, as the world reopens and the economy continues to recover, our retirement portfolios have also seen a substantial recovery except for yields on income-oriented investments. Although we had a brief move up in interest rates last Spring, the recent Federal Reserve meeting has prompted rates to move back down. And in the economy, snags abound. Some of these issues are related to the shutdown, others because of the previous administration’s foreign trade policy, and some possibly related to the 2008 financial crisis

 

 

  What now?

  • Stock market valuations are stretched, and a 16% correction is possible, but the bull market would still be intact.
  • The recent rally in bonds has pushed yields down again but probably temporarily.
  • Commodities could be working to break out of a very long-term bear market.

 

  Stocks 

As a leading indicator, the stock market was quick to signal our ability to respond to the Covid-19 health risk. Since last summer, the stock market has rebounded, surpassing pre-pandemic levels and reaching new all-time highs. These new highs have primarily been fueled by economic stimulus programs designed to dampen the effects of the abrupt and severe economic recession. Some of the cash handed out by these programs is going into the stock market. Recently, it has been reported that the personal savings rate is very high, which is a great sign for the economy; however, so are debt levels associated with spending and investing.

 

 

 Currently, the stock market is overdue for a correction, but we will likely not see a correction unless a significant negative catalyst presents itself. That being said, there are two kinds of stock market corrections we should watch out for, one involving price and the other involving time. 

 A price decline is noticeable, the market drops, and our investment accounts lose value. A time-based correction is slightly different but over the same time span has the same effect. A time-base correction is where stocks move sideways for an extended period, not decreasing enough for concern but also not moving higher. That may be what we see beginning to happen now. Although the major indexes are still inching up, led mainly by large-cap tech stocks like Apple, Google, and Facebook, overall, many stock prices seem to have peaked and are now trading range-bound, up one week and back down the next.

 


  Bonds

  As the economy began to reopen, interest rates moved up starting in mid-February and further into March, but this summer, rates have moved right back down again, and the long-term trend of lower interest rates going back to 1981 is still in play. 

 

 

  But, as we move into the latter part of 2021 and into 2022, analysts expect the global economy to strengthen. Interest rates, spurred by inflation, may eventually break out of that downward channel shown above and possibly begin a new trend higher.

 

   Commodities

The effect of the pandemic-related economic stimulus was to put money into our pockets. And what do American’s do when we have money? We spend it, of course. If you own a home and have checked your Zillow estimate, you will see that real estate is another area that has benefitted from the Federal stimulus programs.  And consumer spending is pushing higher and not just for goods but now into consumer services like restaurants and hotels, resulting in price inflation and shortages all over the place. Commodity prices have been in a long-term downtrend going back to 2008, but we should be aware that things may be changing now.

 

  

You may have noticed that grocery shopping costs more, but going out for a meal may soon cost more as well. One reason for this is a shortage of workers. Partially because of Covid, although another reason is current immigration policies preventing many who fill temporary summer jobs at restaurants and resorts to continue to be locked out of the U.S. 

 And, you may have noticed that the prices for other things like lumber, furniture, or auto parts are also costly lately. 

 

High lumber prices are easing. Here’s what that means for homeowners and homebuyers

 JEFF OSTROWSKI

Bankrate.com 

JUN 25, 2021

 5:32 AM

Home prices are soaring, pushed higher by a combination of record-low mortgage rates, strong demand from buyers and a lingering lack of new construction.

In 2021, a new factor put pressure on home prices: Month after month, lumber prices jumped to new highs. Lumber costs soared more than 30% from January through May.

However, lumber prices finally are cooling a bit as lumber mills ramp up production to meet the frenzied demand. In June, futures prices for lumber dropped below $1,000, off 45% from their springtime peak.

Even so, the National Association of Home Builders says steep lumber prices still tack thousands of dollars onto the cost of a new home, an unwelcome increase for buyers already struggling to find homes they can afford. The trade group has lobbied President Joe Biden and Congress to end tariffs on Canadian wood sent to the United States.

 

  The lack of supply problem for many raw materials may have to do with restrictive foreign trade policy and foreign competition; however, the Great Recession was also responsible for shutting down some of our domestic mining and manufacturing capability. The financial crisis in 2008 left us with excess supplies of everything from houses, lumber, copper, and even Christmas trees. We had too much supply following the financial crisis and those excesses put a lot of manufacturing and mining capability into dormancy. Now that demand has recovered, and excess supply has diminished, we are experiencing shortages.

Indeed, if there is a profit to be had, you can bet manufacturing will expand to meet it, but that takes time, and in the meantime, we are stuck with having to pay more for less.