The Beat Goes On

US equities rose again in August with the S&P 500 Index rising 2.9% over the month. The gains extend the equity market’s winning streak up to seven consecutive months. Global markets rose as well with the MSCI All Country World Index rising 2.4% for the month.

In fixed income, benchmark US Treasury rates seesawed a bit in August, falling, rising materially, and then falling again. Under the surface, there was little change in yield spreads, leaving bond investors largely back where they had started.

Regarding the economy, growth expectations were quite stable, only showing a small degree of weakness at the very end of the month. Per the Atlanta Fed, third quarter US GDP expectations stand at a robust 5.1% (seasonally adjusted annualized rate).

Our Perspective

Although COVID-19’s delta variant is threatening certain areas of the US, as well as causing some localized economic restrictions to be put back into place, in general, it is not yet resulting in a major change to our market and economic outlook.

Instead, we believe the US economy is continuing to chug along at a strong clip, supporting higher equity and bond market valuations. We do, however, believe we have moved to more of a mid-phase of the economic cycle.

We will continue to closely monitor the progression of the variant for its potential impact on our outlook, as well as additional risk factors including global liquidity conditions, labor market wage pressures, and additional macroeconomic factors.

China’s Business Crackdowns

The Chinese government has made a number of moves in recent months to rein in aspects of its private sector that is has deemed to be out of step with party goals. These include crackdowns on a variety of technology, gaming, financial, and even education companies, among other changes.

Our Perspective

China’s economy has already been a bit of an outlier. The country was quick to remerge from the most stringent lockdowns of the pandemic, and it is just now embarking on a policy easing cycle, at the same time as the rest of the world debates inflation and the merits of policy tightening.

Many of these reforms can be viewed as helping strengthen the party’s grip on power, despite their negative impacts on the economy. Our view is that as long as China’s macroeconomic backdrop remains strong, it will continue giving the government latitude to pursue its agenda.

In short, we believe today’s more stringent regulatory environment is here to stay.

For more, check out our recent blog post, China’s Private Sector Crackdown.

Market Impacts from Afghanistan

The sudden collapse of the Afghan National Army and its government has been a startling conclusion to America’s longest war.

Our Perspective

Although there is the potential for significant political and geopolitical impact from the difficult nature through which the US withdrawal occurred, we do not believe Afghanistan has had, or is likely to have, a significant impact on global financial markets.

The country is large by population, but small economically, and its vast natural resources have remained challenging to access. Geopolitically, there are few direct implications today, but potential risks worth monitoring include refugee migration and US-China relations. Domestically, we are keeping an eye on fiscal policy, federal government spending, among other potential risks.

For more, check out our recent blog post, Our Perspective on Afghanistan.

Our View
Economic Cycle		Growth remains robust, and we believe the economy has moved into more of a mid-phase of the economy cycle; many countries are now lapping their massive fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
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 rangebound for some time, 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 is causing 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 the 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

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