This is the eighth 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.
Are We Priced For Perfection?
We were treated to a strong first half of 2021, and so far in July, there has been no letup in the bullish enthusiasm — as evidenced by new highs for the S&P 500, Dow Jones Industrial Average and the NASDAQ.
There’s talk of the highly contagious Delta variant and surprisingly hot inflation readings. However, the themes that have fueled the rally remain intact: low interest rates, Fed bond buys, the reopening trade, the sharp decline in US COVID-19 cases from January’s peak, robust economic growth and strong profit growth.
The biggest concern now is if the market is priced for perfection — this means that any disappointment could create an environment for a market pullback. Market pullbacks are not uncommon in long-term bull markets, however we’ve yet to see a meaningful sell-off this year. Since the second year of the bull market began, the biggest pullback we’ve experienced in the S&P 500 has been 4.0%. That occurred over a three-day trading period that began on May 7th.
Let’s take a deeper look at some things going on in the economy and in the markets:
Treasury Yields Are Down Sharply
The economy is strong, inflation is a concern, but Treasury bond yields are down sharply from late-March’s high yield of 1.74%. What’s behind the unexpected decline?
- The Fed has continually committed to their easy money policy. Even though they acknowledge the rising inflation numbers, they don’t seem to think it is permanent.
- There is worry that the Delta variant could slow growth, or belief that growth has peaked.
- Yields rose earlier in the year, and it’s possible that the yields rose quicker than they should have.
- There is still demand for treasuries, and the yield on US treasuries are higher than in other developed countries.
Quarterly Earnings Blowout
Companies started reporting their second quarter earnings numbers this week, and so far the numbers have been great. The blowout numbers haven’t led to a market jump, so it’s possible that the great numbers were already priced into the market. Investors have realized that companies sandbag their projections so that they can blow them out of the water when they report.
Accelerating Job Growth
The economic growth is creating new jobs and allowing employers to bring back laid off workers. Payrolls grew by 850k in June, up from 583k in May. Below is a three monthly average. There was a sharp acceleration of job creation in March, followed by a more gradual acceleration in June.
President Biden Cancels More Student Loan Debt
Last month, we published a Daily Flash Briefing on President Biden cancelling $3 billion in student loan debt. Additional headlines came out that he now has cancelled up to $40 billion in student loan debt.
First glancing at the headlines, it would seem like you could fill out a form and have your student loan debt wiped out. Not exactly. The $40 billion includes loans for disability, fraud and includes interest payments that were forgiven. This Insider article gives a good account of what has happened with student loan debt since Biden became the President in January.
How Big Is Apple?
Apple’s market capitalization recently crossed over $2 trillion. To put that in perspective, the image below shows how that compares to the Gross Domestic Product (GDP) of some other countries.
Is Breakfast Becoming More Expensive?
Commentary by Kayla Waller.
Coffee prices are rising, which may cause the cost of breakfast to rise. Brazil, the largest coffee producer in the world who produces about a third of the worldwide supply, has been severely affected by droughts that have caused many of the plants to wither away. This is one of the largest hits to output in almost two decades. The main variety of coffee produced in Brazil is called arabica. Prices for arabica beans hit their highest level since 2016 in June.