What a welcome sight to see fans back in the ballparks cheering their respective teams in person rather than virtually. After a year of lockdowns, the broader economic reopening has also been welcomed by the equity markets. The S&P 500 kept rounding the bases in the second quarter, rising over 8% for the quarter to all-time highs, fueled by the prospects of stronger economic data. Given that markets tend to quickly discount new information, the summer months are likely to produce a range bound tug of war in equities between improved fundamentals and uncertainty around interest rates and inflation. So, while investors should not be surprised by a seventh inning stretch over the near-term, we continue to believe this market has a lot of game left to play over the long-term.
The Good
When evaluating today’s investment landscape, the old western movie title “The Good, the Bad and the Ugly” comes to mind. Though a more apropos categorization of current events is closer to ‘The Good, the Still Improving and the Worth Watching’. First the ‘Good’. The monetary and fiscal stimulus employed early in the pandemic and later combined with the vaccine development have successfully gotten the economy across the COVID-chasm and to the starting line of a return to normal. Businesses are reopening, employees are returning to offices and consumers are once again venturing out to malls, restaurants and sporting events. All this has set the stage for a much larger than average expansion of GDP in 2021 that is expected to carry on into next year as well. Additionally, corporate earnings are likely to surprise to the upside as analyst estimates made at the nadir of the pandemic prove overly pessimistic.
The Still Improving
Within the ‘Still Improving’ category, a couple of dynamics stand out. A year’s worth of pent-up demand for all manner of goods and services has overwhelmed producers and supply chains creating numerous dislocations that will take time to balance. Businesses are reopening to eager customers creating a huge need for workers. This is clearly evident in ‘Help Wanted’ signs in just about every storefront. The high-volume strategy of a local distributor of metals and industrial supplies has been my personal favorite. It certainly did its job of catching my attention during my commute.
We anticipate that laborers will increasingly head back to work as vaccinations rise, employers offer incentives and government programs wind down. And while wages across many entry-level positions have risen of late and deservedly so, a growing labor force will help keep wages from spiraling to the point of economic harm. Inventories of physical goods are also running well below current demand levels. Buying a bike has never been such a challenge! We expect this imbalance to ebb as well as manufacturers get operations back to full capacity and higher prices in the most affected areas temper demand until inventories can be fully replenished.
