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Volume 10, Edition 27 | August 9 – August 13, 2021

“Peak Everything” Misses the Point

Doug Walters, CFA
With the stock market hitting all-time highs, “peak everything” has become the buzzword for alarmist commentators. While it makes for great headlines, it misses the point.

Contributed by Doug Walters, Max Berkovich

Thank you to our readers for allowing us to take last week off! We are hitting the ground running, refreshed, and with the stock market reaching all-time highs. With the buoyant markets come increasingly loud calls for “peak everything.” While it makes for great headlines and piques the interest of wary investors, the argument is flawed.

“Peak Everything” refers to the fact that we may be approaching a peak in economic growth, corporate earnings, housing prices, inflation, monetary stimulus, fiscal stimulus, etc. You name it, and it is peaking. The primary concern is that as corporate earnings peak, so will stock prices, leaving investors to question if they should exit the stock market.

But…

  • … of course, everything is peaking compared to last year! This time 12 months ago, enormous segments of the economy were shut down. A simple normalization of economic activity has created unprecedented year-on-year growth. In the second quarter, companies reported an average earnings growth of over 90%! That pace of expansion has to moderate. What matters more is where growth settles a year from now. It is quite possible that with more fiscal stimulus coming, growth could remain at above-average levels despite falling from the current unsustainable pace.

And…

  • … it is the wrong question. The future is unpredictable. Who would have predicted we would be in the midst of the worst pandemic in a generation and that the stock market would be hitting all-time highs? Better questions for investors to ask are, “Am I invested at a level of risk that is consistent with my ability to take on risk?” and “Do I have a well-diversified portfolio ready to capitalize on the market’s ups and downs?”

Long-term investing success comes from sticking to your process through the ups and downs, not from trying to guess when those ups and downs will occur. Market timing does not work (unless you are lucky). An evidence-based approach focused on proven processes is a better recipe for success.

4.3%

Inflation shows signs of peaking

This week investors, The Fed, and consumers received a welcome sign that the current bout of inflation may, in fact, be transient, as Core CPI fell from 4.5% to 4.3%.

Headlines This Week

Building Up the Economy

The bipartisan infrastructure bill took a big step forward in Washington this week, with the Senate passing the bill comfortably, with a 69-30 vote.

  • Passage in The House will take some time as the majority will likely tie passage to the $3.5T human infrastructure bill. As such, a signed law is not expected until the fall at the earliest.
  • The second, larger infrastructure bill will likely contain both stimulus and higher corporate and capital gains taxes, of which investors will be trying to ascertain the net benefit. There will be many opinions on both sides of the argument, and the stock market will always reflect current sentiment, but the real answers will not come for many years. With stocks hitting an all-time high this week, investors appear fairly comfortable with the current direction.

Inflated Expectations

Investors cheered the CPI inflation report for July, which was largely in line with expectations.

  • The report was highly anticipated and showed a halt to inflation growth. While still at a high level, core CPI actually fell from 4.5% to 4.3%.
  • It appears investors feared a continued expansion of inflation, so the report, despite being in line, was welcome news.
  • The Fed now has the first tangible data point that the recent bout of inflation may actually be transitory.

Getting to Work

The July Non-Farm Payrolls report was a big talking point this week.

  • The report showed that payrolls grew by 943K in July, above consensus. The two prior months were also revised up.
  • Unemployment fell to 5.4% from 5.9%, while average hourly earnings grew 4.0%.
  • The better than expected number was favorable for the “recovery” theme, which helped to boost sentiment for value stocks.
  • The separate JOLTS report, which looks at job openings, showed that job openings are at record highs, new hires jumped, but matching up job seekers with job openings is still a challenge. The number of openings is higher than the number of unemployed.

The Week Ahead

Leading the Pack

The Reserve Bank of New Zealand (RBNZ) is widely expected to become the first central bank to raise interest rates when it meets next Wednesday.

  • New Zealand’s economy has been steadily gaining strength, with unemployment now at pre-covid levels along with a booming housing market.
  • The country’s central bankers are expected to step on the brakes by raising interest rates out of concern for growing inflation. If confirmed next week, New Zealand will become the first economy to raise its rates after central banks around the world slashed theirs in response to the pandemic.

Tapering Data for the Fed

Several key indicators are out next week with expectations that the Federal Reserve will be watching closely to determine when tapering should start.

  • The latest retail sales numbers are out on Tuesday and a town hall with educators and students hosted by Fed Chairman Powell.
  • Then on Wednesday, the central bank will be releasing the minutes of its July meeting, where the market will likely comb through for any hints that might not have been initially apparent last month.
  • Several members, including the vice-chairman, have started to get behind the idea that the Fed should begin withdrawing liquidity soon.
  • As the decision to taper could come as soon as October, the discussion has shifted to the mechanics that the Fed will employ as the central bank is currently buying $120 bn a month of bonds split between mortgage-backed securities (MBS) and Treasuries.

Retail Week

A host of prominent retail names will be reporting earnings next week as earnings season winds down.

  • Big names to look out for include Home Depot (HD) and Walmart (WMT) on Tuesday, Lowe’s (LOW) and Target (TGT) on Wednesday, and Ross (ROST) and Macy’s (M) on Thursday.
  • On a different note, Robinhood Markets (HOOD) will have its first report on Wednesday after its disappointing IPO two weeks ago.

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