Economic growth and employment gains continue in the U.S.
While pandemic-induced supply disruptions are leading to lower 2021 growth expectations, forecasts for next year point higher as the supply issues resolve themselves. Employment gains continue but payrolls remain below the peak pre-pandemic levels by over 5 million jobs* despite ample job openings. Overseas, economic growth rates generally are positive, although some European developed markets are experiencing similar supply issues.
Short-term inflation concerns associated with supply-demand imbalances are present. The most recent total PCE Price Index rose above 4%*. Longer term expectations remain relatively unchanged, just slightly ahead of the Federal Reserve Board’s target 2% level.
Equity market performance year-to-date remains strong
Global equities are up approximately 11% year-to-date with the U.S. displaying stronger performance than developed and emerging markets. The quarter ended on a bumpy note, most prominently in the emerging markets and specifically in China, over political concerns and media reports of difficulties being experienced by Evergrande, a large China-based property developer.
We are maintaining portfolio positions in emerging markets since in the long run these countries are expected to have higher economic growth rates than developed market economies and are currently attractively valued.
Monetary policy faces “tension” between its mandates of full employment and target inflation of 2%
Near quarter end, Fed Chairman Powell spoke of “tension” between inflation and employment being the biggest challenge the Fed currently faces. While monetary policy continues to be accommodative, the Fed is expected to begin tapering its asset purchases this year even if it doesn’t start raising rates until later. The 10-year treasury note ticked up about a quarter of one point during the quarter, reflecting the forward-looking nature of markets.
Many uncertainties remain at quarter end. In addition to those mentioned above, the U.S. has legislation pending on a large infrastructure package which includes potential tax changes to fund this package using budget reconciliation. The debt ceiling is a concern and there are also changes coming to the Federal Reserve Board, with a possible change in leadership. Last, but not least, is the pandemic. While vaccination rates have increased in the U.S. and many countries, challenges remain in many poorer, less developed countries and the potential for variants such as delta continues to be a risk.
The value of diversification
The best defense against the uncertainties we see and those we don’t see is a well-diversified portfolio appropriate for each investor’s tolerance and capacity for risk. Long-term, it is important to stay the course with your investment strategy unless you experience a change in your circumstances. Your HTG advisory team welcomes any questions or updates you would like to share with us.
*Federal Reserve Bank of NY/Bureau of Labor Statistics via Haver Analytics