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Key Points for the Week
Last week, the National Bureau of Economic Research (NBER) finally announced the official dates for the recession that occurred in 2020. Economic activity peaked in February 2020 and bottomed in April 2020. That makes the pandemic recession the shortest in American history.
According to the NBER:
The recent downturn had different characteristics and dynamics than prior recessions. Nonetheless, the committee concluded that the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warranted the designation of this episode as a recession, even though the downturn was briefer than earlier contractions.
The National Bureau of Economic Research
Since then, the United States’ economy has accelerated, leading the developed world in the economic recovery. A gradual slowdown is inevitable. However, three obstacles may result in a sharp deceleration, reported The Economist.
#1. Inflation. A shortage of goods triggered inflation. Consumers have noted some price hikes, although others are less obvious. Makers of cereal, snacks, candy, and other products are offering unchanged packages, priced as usual, that hold smaller quantities of product, reported Axios. The technique is known as shrinkflation.
#2. The end of pandemic policies. Enhanced unemployment benefits end in September, and the national moratorium on evictions ends in late July. The latter was the first of its kind and no one is certain how unwinding it will affect the economy, reported The Economist. Almost 36 percent of adults living in households are behind on rent or mortgage payments, according to the latest Household Pulse Survey.
#3. Spread of the Delta variant. The average number of coronavirus cases is up more than 180 percent over the last two weeks. “In the near term, the economic impact of the new wave of the pandemic in the U.S. could hinge on whether governments ratchet up restrictions intended to curb the virus’ spread.” reported Josh Nathan-Kazis of Barron’s.
While risks to economic growth persist, the earnings of publicly traded companies are strong. So far, 24 percent of the companies in the Standard & Poor’s (S&P) 500 Index have reported second quarter earnings. Year-to-year blended earnings growth has been stellar, in part, because of how bad things were during the second quarter of last year, reported John Butters of FactSet.
Net profit margins, which could have been trimmed by inflation, are currently 12.4 percent. That’s the second highest level since FactSet began tracking data in 2008. Analysts anticipate profit margins will average 12 percent through the end of 2021.
The more contagious Delta variant has contributed to a 172% increase in U.S. COVID-19 cases over the last two weeks. The spike is raising concerns some social distancing measures may be re-enacted. Initial jobless claims are increasing. Last week claims jumped above 400,000 after staying below that threshold for several weeks.
Based on current projections, S&P 500 earnings will increase 74.2% as earnings last quarter are comparing favorably to the quarter most affected by social distancing measures in 2020. Given normal earnings trends, earnings growth will likely finish even higher.
Concerns about the Delta variant pushed stocks lower last Monday, but stocks rallied the rest of the week and finished at a record high on Friday. Last week, the S&P 500 and the MSCI ACWI both gained. The Bloomberg BarCap Aggregate Bond Index increased slightly.
This week, Thursday’s U.S. gross domestic product heads a list of key economic releases that include a Federal Reserve meeting, eurozone GDP and CPI and Japanese employment.
Last week, we detailed how inflation has been increasing because of components tied to moving around. Inflation isn’t the only key data point in an uptrend. This week’s update examines recent upward trends in COVID cases, S&P 500 earnings, initial unemployment claims and the stock market.
COVID cases have been on the rise as the Delta variant has become the dominant U.S. strain. The Delta variant appears more contagious than previous variants, and the success of the vaccines against this variant is yet to be determined. Areas where vaccinations have lagged have contributed to the increase in cases and growing hospitalizations.
The uptick in cases could trigger additional social distancing measures and slow the recovery. If additional measures are implemented, the expected economic consequences would likely be smaller. Governments have a better idea of which social distancing measures helped stem the tide and which hurt the economy the most. Countries that have reintroduced social distancing, such as Japan and Australia, haven’t seen the same economic consequences as companies will be able to pivot toward other plans. The economic costs will increase if schools decide to reintroduce remote learning, as parents may need to work less to support children.
S&P 500 Earnings
Analysts estimated earnings would grow more than 60% in the second quarter. Based on robust reports for the first 25% of S&P 500 companies, the final growth rate could be around 80%. Earnings growth compared to last year is so strong because earnings dropped sharply during the peak periods of social distancing and have been rallying during reopening.
Initial Unemployment Claims
Initial unemployment claims jumped back above 400,000 last week after dropping below this important threshold in recent weeks. These numbers seem very high compared to the very low number of claims just before COVID. During that period, results in the low 200,000 range were common.
A longer-term evaluation suggests current trends may be more normal. The data shows that periods of economic strength can include times when initial unemployment claims are high. The Reagan recovery during the mid-80s and again in the mid-90s both had periods when initial unemployment claims were high even though the economy wasn’t in recession.
Despite concerns about COVID, the S&P 500 keeps moving higher. A sharp decline last Monday preceded a four-day rally that sent the S&P 500 to new highs. Market performance has remained strong despite some obvious risks. But some markets are lagging. The MSCI ACWI Index, which is more than 50% invested in U.S. companies, is trailing the S&P 500 by 4.9% this year. Given the strength of the U.S. components, international markets are likely reflecting a slower recovery from the pandemic and may also be showing a greater wariness that these trends could be more problematic than investors in U.S. stocks realize.
The Tokyo Organizing Committee of the Olympic and Paralympic Games took a new approach to producing medals. “Approximately 5,000 medals have been produced from small electronic devices that were contributed by people all over Japan…From the procurement of the metals to the development of the medal design, the entire country of Japan was involved in the production of the medals for the Tokyo 2020 Games – a project that was only possible with the participation of people across the nation.”
The current medal format – awarding gold, silver and bronze medals to the top finishers in each event – was introduced during the 1904 Olympics. For a few years, around that time, the medals were made of gold, silver and bronze, but that’s no longer the case. The medals awarded at the Tokyo Games are composed of a variety of metals.
Of course, the real answer to the question about the value of Olympic medals is that they are priceless. The achievement they represent, becoming one of the world’s best athletes in a sport, has a value that cannot be measured in dollars and cents.
The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.
The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.
July 26, 1775: U.S. Postal System Established
On July 26, 1775, the U.S. postal system was established by the Second Continental Congress, with Benjamin Franklin as its first postmaster general. Franklin put in place the foundation for many aspects of today’s mail system.
During early colonial times in the 1600s, few American colonists needed to send mail to each other; it was more likely that their correspondence was with letter writers in Britain. Mail deliveries from across the Atlantic were sporadic and could take many months to arrive. There were no post offices in the colonies, so mail was typically left at inns and taverns.
In 1753, Benjamin Franklin, who had been postmaster of Philadelphia, became one of two joint postmaster generals for the colonies. He made numerous improvements to the mail system, including setting up new, more efficient colonial routes and cutting delivery time in half between Philadelphia and New York by having the weekly mail wagon travel both day and night via relay teams. Franklin also debuted the first rate chart, which standardized delivery costs based on distance and weight.
Today, the United States has over 40,000 post offices and the postal service delivers more than 200 billion pieces of mail each year to over 144 million homes and businesses in the United States, Puerto Rico, Guam, the American Virgin Islands and American Samoa. The postal service is the nation’s largest civilian employer, with roughly 500,000 career workers. The postal service is a not-for-profit, self-supporting agency that covers the majority of its expenses through postage (stamp use in the United States started in 1847) and related products. The postal service gets the mail delivered, rain or shine, using everything from planes to mules.
You can lead a man to Congress, but you can’t make him think.
Milton Berle, Comedian
There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare.
Mary Renault, Author
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Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold, or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future.
Any expression of opinion is as of this date and is subject to change without notice. Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Diversification and asset allocation do not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will be successful.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented.
Please note, direct investment in any index is not possible. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Third-party links are being provided for informational purposes only. SPC and S&M are not affiliated with and do not endorse, authorize, sponsor, verify or monitor any of the listed websites or their respective sponsors, and they are not responsible or liable for the content of any website, or the collection or use of information regarding any website's users and/or members. Links are believed to be accurate at time of dissemination, but we make no guarantee, expressed or implied, to the accuracy of the links subsequently.
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