Where Does The Fed Go From Here?
A short question, with a difficult answer. No one knows for sure about the “when”, but soon the Federal Reserve Board will begin to taper the buying of bonds. In the short run, it will likely cause the equity markets to slip downward, but it should not be a signal for a recession as some are suggesting. Within the next few days, there is a meeting in Jackson Hole, Wyoming that could provide a hint of when they might start tapering, but it is much more likely to come at either the September or November Fed meeting. By “it” we mean they will give us a hint. To start without a hint is a bad policy in our book. Think back to May 2013 when then-Fed Chair, Ben Bernanke “hinted” at the taper coming out of the 2008-09 recession, the markets tanked, took a little time to digest the news, and then the economy and markets recovered. That scenario makes sense to us again. Given that there is still plenty of stimulus money, the economy should continue to be strong throughout this year and into next. 943,000 jobs were added this past month and the May and June numbers were revised higher by a total of 119,000. We expect the employment numbers to slow as the delta variant plays out across the U.S., which will cause companies to tread carefully in hiring new people. That said, there is a record number of job openings at over nine million. Credit card debt is going up after people were careful with their spending. The stock market is selling at 21 times future earnings after reporting higher than expected 2nd quarter earnings growth, down from about 27.5 times before earnings announcements. As was the case with COVID, it is what we don’t know that always bites us, but shy of that possibility, things are looking pretty good for the next year.
Is A Digital Currency Coming To A Country Near You?
Digital currency has been in the news the past few years with Bitcoin and Ethereum leading the way. As discussed in the past, it is only a matter of time before a country develops its digital currency. There are a few reasons to consider a digital currency going forward from a country’s perspective. First, it would be very hard to counterfeit. It also would add to the convenience, with all of us dealing in a cash-free environment making it safer at a personal level. However, it also takes away the anonymity that comes with paying cash. The U.S. is probably not going to be the first country to press forward as China is already testing the use of a digital currency as well as others. We’re still just exploring.
Consumer Debt And Confidence Are Back
During July, the Consumer Confidence Index rose for the sixth straight month, topping out at 129.1. While still below the pre-COVID levels, its acceleration this year has been amazing. That has translated into consumers feeling good enough to raise borrowing by $37.69 billion in June, the largest increase ever, following on the heels of May’s borrowing at $36.69 billion. The largest part of this increase was credit card debt rising $17.858 billion in June even as the money from the government was beginning to decline. If the new jobs numbers continue to increase at 500,000 plus, and the unemployment numbers continue to decline, it should bode well for consumers to pay off this debt. Clearly, the pent-up demand that we have been expecting is not only happening, it is happening in a big way. All of this consumer activity, which accounts for about 66% of GDP, caused our economy to be bigger at the end of the second quarter than it was in December 2019 just before the pandemic. This is part of the reason that it looks good for the economy and the markets over the next 12 to 18 months. That said, it would not surprise us to see a pullback this fall in the equity markets as they consolidate the gains from this year. Patience and discipline will be your friends during that time.
The Battle Heats Up
Back in the days before the financial crisis, the housing market was so hot, it seemed that it would never stop. Of course, nothing continues forever, and it came crashing down in 2009 and 2010. Today, many are wondering if this is happening again. Over the past 12 months ending in March, real estate prices across the U.S. have increased by 17%, according to Redfin. This is the fastest year-over-year gain since 2012 when we came out of the Great Recession. Almost half of the homes that have listed are selling within one week and usually with multiple offers, often above the listing price. Many of these offers are all cash. What is driving this growth? First, and most obviously, is low interest rates. It isn’t so much about the cost of the home, it’s about the amount of the monthly payment. Next, many people have accumulated lots of cash during the pandemic because of both the stimulus checks and the lack of spending over the past year. Also, consider that many folks, especially younger ones, now want to move out of the close quarters of the “city” and are moving to the suburbs. As prices continue to increase and interest rates eventually rise, the pace will slow. Will prices crash? Perhaps not, but they could decline. Only time will tell.
2Q Corporate Earnings Update
With over 90% of S&P 500 companies having reporting earnings, the blended earnings growth rate currently stands at 101% over last year’s earnings. If that is the final number, it will mark the highest year-over-year earnings growth for the S&P 500 since the fourth quarter of 2009 (109.1%). The highest growth has been in cyclical sectors that suffered major setbacks from the pandemic last year like energy, industrials, and consumer discretionary. To put this strong growth into context of expectations, it’s almost double the 53% estimate back at the end of March. Some of the largest beats relative to estimates have been coming from unlikely sectors like utilities, real estate and consumer staples. Just one year removed from the corporate earnings trough in 2Q20, analysts are estimating that growth peaked in 2Q21, expecting “only” 28% growth in the third quarter as we begin to lap more difficult year-over-year comparisons.
Building Wealth – Different Motivators For Men and Women
- Women are less concerned about using wealth to build social status or a legacy.
- Women do not cite early retirement as a key motivator for building wealth while men do.
Happy In Retirement?
What helps make people in retirement feel happy and secure? According to the Employee Benefit Research Institute’s Retirement Security Research Center, those with a regular income stream, little or no debt, a budget, and employer-provided assistance while working were happiest. Not a big surprise. Those who had a guaranteed income (traditional pension, Social Security, annuity) stream were more comfortable than those without this source of cash flow. The more debt a person has in retirement, especially credit card debt, the less satisfied the individual was. Retirees who got financial coaching through the provider of the company’s 401(k) program were in a better position than those that did not have this advantage. The survey defined those with an income of $40,000 to $100,000 and savings and investments of $99,000 to $320,000 as “comfortable”. An “affluent” retiree was one with over $100,000 of income and assets of $320,000 or more.