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August 2021 Perspective


Aug. 4, 2021

Yet Another Strong Month

The US stock market delivered another month of gains, albeit more modest than what we have seen of late. A strong upsurge in economic activity continues to drive positive equity performance, with an assist from last month’s news of the newly agreed upon bipartisan infrastructure package.

In fixed income, rates fell rather swiftly, further unwinding the sharp spike in yields witnessed to begin the year. The decline in yields boosted performance for fixed income investors as prices and rates move inversely to each other.

Our Perspective

The domestic economy has been benefitting from several tailwinds, including from a wave of pent-up demand, the spending down of last year’s elevated consumer savings, and the continuation of highly accommodative fiscal and monetary policies.

Although these forces are driving strong growth today, we believe it is unlikely that they will persist over the long-term. Our view is that economic growth is likely to decelerate back down to more sustainable rates of growth as these forces dissipate.

Additionally, while fundamentals are strong, valuations are broadly elevated in both equities and fixed income. High valuations are likely to challenge long-term forward returns.

Understanding Blockchain

After losing over half its peak value earlier this year, Bitcoin prices rallied last month, briefly crossing back above $40,000 and boosting the value of a variety of cryptocurrencies along with it.

Our Perspective

While we do not own any digital assets (i.e., cryptocurrencies) in client portfolios, we are closely monitoring the developments and underlying technologies of this emerging field.

The core blockchain technology that enables cryptocurrencies has several notable advantages, as well as disadvantages, versus traditional data storage and verification techniques. Additionally, while the blockchain may seem impenetrably complex to some, it is actually a relatively straightforward and flexible system, allowing for the creation of unique digital assets that solve particular use cases.

We believe the blockchain is a potentially disruptive technology that may have investment implications beyond cryptocurrencies due to its commercial uses and growing acceptance, and we remain a keen observer of the space.

For more, check out our recent blog post, Understanding Blockchain and Digital Assets.

Wage Increases and Inflation

Last month’s US Consumer Price Index showed a sharp increase in inflation, 0.9% seasonally-adjusted month-to-month and 5.4% year-over-year, for the month of June. These were the highest readings since 2008 for both data points.

Our Perspective

Inflation has been rising as the economic recovery, various stimulus programs, supply chain disruptions, and more, all come together to drive prices higher for goods and services.

We believe, however, that it remains unclear whether today’s rising prices are a post-pandemic anomaly or something that is here to stay. One of the keys to that question is the labor market, and while it is showing pockets of tightness in some areas, wage growth broadly remains muted.

Should inflation materially rise, areas such as gold are likely to be chief beneficiaries. In the meantime, we will continue keeping a close eye on a variety of labor market and wage indicators for signs that inflation might be sustainably higher in the years ahead.

For more, check out our recent blog post, An Update on Wages and Inflation.

Our View
Economic Cycle Vaccines, economic re-openings, and fiscal stimulus has dramatically reaccelerated the pace of the recovery, substantially boosting economic activity and business/consumer confidence
Stock Market The US stock market is well past pre-pandemic levels and at all-time highs; valuations are broadly elevated, which, alongside rising interest rates, market concentration, inflationary pressures, and peak earnings, pose significant risks
Bond Market Although rates have been falling for the past several months, they remain significantly above pandemic lows; corporate and municipal bond credit spreads have significantly tightened, and in some cases, are depressed beyond pre-pandemic levels
Foreign Exchange While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar COVID-19: although the Delta variant may cause regional flare ups, we still believe the worst of the crisis is still behind us, and the US economy is likely to remain mostly reopen, driven by vaccine efficacy and distribution
Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
China Credit Cycle: China is further along in its economic recovery and its credit cycle appears to have peaked, potentially creating a capital markets headwind ahead
Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks may lead to some transitory inflation issues near-term

Indicates change

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc. This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.

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