This is the a new installment in an ongoing series where Marc Bautis, Wealth Manager and Founder of Bautis Financial, comments on hot topics in the financial industry. Today, Marc is joined by Kayla Waller, Bautis Financial’s Paraplanner.
The recent spike in COVID-19 cases due to the Delta variant has had little effect on the overall market, as evidenced by the recent highs we are seeing. Currently, most believe protection from the vaccines will be a formidable defense against serious new restrictions that would effect economic growth. Here are a few themes we are seeing right now in the economy.
Job Growth is Accelerating
Since bottoming in April 2020, the economy has created 16.7 million jobs with 4 million jobs created this year. We still remain 5.7 million jobs below the prior (February 2020) peak.
The chart below shows the 3 month moving average of payrolls and illustrates the acceleration in job growth. As the economy reopens, consumers spend money and businesses respond by hiring.
One of the yardsticks the Fed has been using to begin tapering it’s $120 billion in monthly bond purchases has been “substantial further progress” in the labor market. For the first time, the Fed acknowledged in it’s July statement that “progress has been made,” however comments from Jerome Powell, Fed Chairman, suggest that he’s in no hurry to shut down the easy money spigot. He stated that “we have some ground to cover” on the labor market, and “we’re some way away from having had substantial further progress…”
When it comes to the Fed, the other question that often comes up is when they are going to raise interest rates. Powell said, “it’s not something that is on our radar screen now… when we start to get to the question of liftoff, which we are not at all at now or near now, that’s when we’ll ask that question.”
Quarterly Earnings Have Been Crushing It
Most of the companies in the S&P 500 have reported second quarter earnings, and the numbers have been really good. Earnings are up 93% versus one year ago. While we knew they were going to be up after the shutdowns last year, the forecast only projected earnings would be up 65.4%.
And it’s not just the previous quarters earnings which have been generating momentum. Analysts are ratcheting up their 3rd and 4th quarter forecasts from what was previously projected. These rising forecasts have provided a boost for equities.
Reverse Stock Splits
I often am asked whether a company that just announced a stock split is a good investment. My reaction is usually lukewarm, and I rarely take the fact that they are going through a split into the analysis. A two-one stock split means that for every share you own, after the split, you have two shares. However after the split, the stock price is halved — so you really wind up at the same place. 100 shares of Apple at $100 a share is the same as 200 shares of Apple at $50 a share. You still own $10,000 worth of Apple. The one thing to think about regarding stock splits is that a company usually only considers them if their stock price has been ascending.
GE recently underwent a reverse stock split. This is done when a company tries to raise their stock price in hopes of making it more marketable. Instead of getting more shares during the split, the shares you own are decreased. If you’ve followed GE over the years, you will understand why they are trying to do this. Their stock has been down in the dumps for a while. And analysts are split on GE’s path forward.
Household Debt Has Risen The Most Since 2007
Commentary by Kayla Waller.
According to a quarterly report published by the Federal Reserve Bank of New York, U.S. household debt increased by $313 billion during the second quarter. This is the largest increase since 2007. A major driver of the increase was growth in mortgage balances, which rose by $282 billion from the first quarter. This can partly be attributed to rising home prices and the waves of people refinancing since borrowing costs are so low. Credit card and auto loan balances rose as well.
During the pandemic, government efforts kept delinquency numbers in check. The report shows that some 2.7% of the debt was in some form of delinquency. This is a 2% drop from the fourth quarter of 2019, just before the COVID-19 pandemic hit.
In the coming months, forbearance programs are set to expire and borrowers will have to figure out how to get current on their outstanding loans.
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