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July Update

Happy Summer! I may not know what the weather is like where you live but, in Central Texas, it has been rather wet and unseasonably cool. Mind you, that means 95 degrees in July. However, that is much better than having a long streak of 100+ degree days to which we are normally accustomed. 

I wanted to provide you with an update on the market and economic things we are watching as it relates to your investments and financial wellness.

With the start of the third quarter, it is time for corporations to report earnings. We expect to hear of exceptional growth rates since the beginning point is the depths of last year’s pandemic-related sell-off. While many companies are improving, the real test is how well they are doing since March of 2019. That is something the financial press will ignore.

While the global economy is recovering from the nearly universal shutdown, the U.S.A.’s economy is faring better than any other. That is good news. As with all economic cycles, some sections are making better progress while some still struggle.

Never expecting such a rapid recovery, most businesses prepared for long and difficult conditions reducing inventories and staff to preserve capital. Today, consumers are ignoring the consequences of shortages and paying higher prices for items in demand.

Many consumer items come from China where the largest port continues to be hampered due to the Coronavirus. The cost of shipping a 40-foot container to the USA is nearly $10,000.1 Importers have reached their limit of absorbing shipping costs which can be expected to push retail costs and inflation higher.

Food inflation is problematic, especially for lower-income households. It is not likely to improve this year due to global drought conditions. Brazil is the world’s largest exporter of coffee, sugar, and oranges.2 Really. Drought conditions are so severe, rivers used to transport products are too low to float needed shipping. It is, also, creating shortages of hydropower. In the U.S.A., the drought has caused below-trend corn yields. Less product means higher prices. Corn and soybean prices are both at eight-year highs.1 Expect to pay more.

Lower oil prices were headed our way as the world’s largest exporter until the current White House administration canceled the Excel pipeline giving control back to OPEC. Now the Administration is proposing new limits on drilling on federal lands and waters. In addition, the limitations will come with an increase in taxes on extractions.2 Expect higher prices at the gas pump, all things delivered to your door and all things made from oil. That’s just about anything you buy today. This is only “transitory” if voters replace the Administration at the next election. Otherwise, it is more inflation.

Secretary of Treasury Janet Yellen has been working in Venice. Italy, that is. Not the beach in California. She has helped global finance ministers understand the benefit of taxing companies that do international business.3 They have embraced a 15% tax on cross-border sales which has the greatest detriment on major U.S. companies. No longer U.S.A. first. It is a global community first policies. Post-conference, she will stay in Europe with other leaders to convince them to not tax our Internet providers.4

The second-largest global economy is China which has been a powerhouse since the Great Financial Collapse. Recently, the Chinese Cyberspace Administration has been tightening restrictions on Chinese companies with stocks that trade in the U.S.A. In addition, it has been imposing stiff controls on internal tech companies. The China Miracle of embracing capitalism is shrinking as Communist Party politics win.5 To counteract an economic slowdown that would endanger global growth prospects, the People’s Bank of China just reduced bank reserve requirements.1 That is tantamount to admitting the economy isn’t as strong as the government reports suggest.2

As for stocks, Mr. Market has been confused in recent months as inflation was, was not, then, is a problem. The Federal Reserve official position remains unchanged3 in its view that inflation is “transitory.” The duration of transitory remains undefined.

We know labor shortages are real in most every segment of the economy. Part of that is many Boomers who were furloughed last year liked staying home. They retired.4 Businesses had no plan for their most experienced employees to just quit. Gen-Xers just received a shorter ladder to the corporate top. Within the hospitality industry, restaurants, hotels, etc., 38% of former employees report they will not return.5 Enough with terrible schedules and low pay. It is a new career for them.

Market valuations are the highest on record second only to the 2000 technology bubble. It does not mean that we are at a high facing a bear market. An extended valuation can persist for years. It does mean, in our opinion, that the next bear market will likely be a real doozy. As we were last year, we expect to be in cash with our advisory clients should that scenario unfold. 

For investors still relying on Modern Portfolio Theory6 “Pie Chart” diversification, the pain may be as great as the 30-month tech collapse. The normal rescue plan is for the Fed to substantially reduce interest rates. Ten-year Treasuries are trading at less than 1.5%. How much can that help? At the last market drop, rates were 6%.

If you are not an advisory client whereby your portfolio is actively monitored using technical analysis, please give us a call. We will review your account holdings and determine what might be the best course of action for you.

Next month, we will discuss our view of the Biden administration's tax policy proposals.

As always, please reach out to our office, at 800-491-4508, with any questions or service needs. We hope you enjoy the remainder of your summer season.




[1] https://www.bloomberg.com/news/articles/2021-07-09/china-cuts-reserve-ratio-for-banks-to-support-small-businesses?cmpid=BBD071221_MKT&utm_medium=email&utm_source=newsletter&utm_term=210712&utm_campaign=markets&sref=otZgjKT7

[2] https://www.bloomberg.com/news/articles/2021-07-11/china-s-fading-first-in-first-out-rebound-sends-global-warning?cmpid=BBD071221_CORONAVIRUS&utm_medium=email&utm_source=newsletter&utm_term=210712&utm_campaign=coronavirus&sref=otZgjKT7

[3] https://www.bloomberg.com/news/articles/2021-06-22/powell-says-inflation-from-reopening-larger-than-expected?sref=otZgjKT7

[4] https://www.pewresearch.org/fact-tank/2020/11/09/the-pace-of-boomer-retirements-has-accelerated-in-the-past-year/

[5] https://www.globest.com/2021/07/12/restaurant-ma-expected-to-surge-with-end-of-pandemic-lockdowns/?kw=Restaurant%20M%26A%20Expected%20To%20Surge%20With%20End%20Of%20Pandemic%20Lockdowns&utm_source=email&utm_medium=enl&utm_campaign=nationalamalert&utm_content=20210712&utm_term=rem&enlcmp=nltrplt4

[6] https://www.stat.berkeley.edu/users/aldous/24/Posted/Ali_Setayesh.pdf

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