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We are now more than midway through 2021 and the landscape continues to be mixed. Many positive signs abound. Yet our country and the world at large continues to grapple with the dynamic nature of the pandemic even as many economic indicators move in favorable directions. This has caused unsurprising moments of market volatility.
So what should we make of the investing year in progress? Here are just a few of the trends and indicators we at Two Point Capital Management are watching closely as we move deeper into the second half of the year.
For the most part across 2021, the financial markets have taken an optimistic view of the future. We have experienced market dips in response to trends in the news, including around the COVID-19 Delta variant. But factors like a strong job and wage growth and continued high levels of consumer spending have helped to fuel record highs.
Corporate valuations are currently reflecting solid GDP growth. And with inflation anticipated by many experts to remain relatively moderate, there is good reason to believe that the financial markets will retain an optimistic view into 2022.
U.S. Personal Consumption Expenditures grew at a seasonally adjusted annual rate of nearly 12 percent in the second quarter of 2021, significantly contributing to overall GDP expansion. That spending continued the trend of reduced growth of essential/durable items seen during the first year of the pandemic – with consumers now gradually increasing their spending on services and experiences. Today travel, transportation and out-of-home dining are among the top ranked expenditures that are experiencing accelerating growth among American consumers.
Although the Delta variant may cause a short-term pause in this trend, it is likely we will see consumer spending on services continue to further support a recovery among some of 2020’s hardest hit sectors.
While certain sectors such as the cruise industry have continued to struggle with the rolling realities of the pandemic, many corporations are demonstrating significant resilience.
Corporate earnings reports have generally been very strong. This means positive impacts for employment and a host of other factors – while sending encouraging signals to the financial markets about the fundamentals of the corporate sector as a whole.
There are a number of interesting areas we are watching, many of which are tied to behavioral/demographic shifts and innovation. A few examples include real estate and home-buying patterns, fintech and the digitization of all aspects of our financial lives, shifting patterns around debt, and critical emerging technologies like batteries and AI.
It’s no surprise that the financial markets watch the Federal Reserve closely for any signals as to what might be coming next. So it’s notable that the Federal Reserve has begun openly discussing the possibility of reducing bond purchases.
The Fed publicly announced it could begin slowing its bond purchases as early as October 2021. There is also continued talk about the possible timeline for interest rate increases. While recent comments by the Fed -including the statement issued on Friday August 27 at the conclusion of the Jackson Hole Economic Symposium – seem to defer any rate movements to 2022 at the earliest, this will remain a news headline. Any movement on either of these fronts will have an impact on the investment landscape.
Going into the second half of the year, our team at Two Point Capital Management remains focused on managing risk during the ongoing transition from a “COVID economy” to one that is more balanced. Since this transition is likely to stretch through next year, the key will be to remain focused on and committed to longer-term opportunities and risks as they evolve.
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