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The View from BELL ROCK – Inflation Remains a Key Question, Jobs Take Center Stage

Quarterly corporate earnings are poised to come in strong, resulting from increased share buybacks and a rise in M&A activity throughout the last year.  The recent positive stress test results in the banking sector supported several immediate dividend boosts and share repurchase plans from large banks (such as JPM, Citi, etc.).  On the fiscal agenda, the $1T scaled back infrastructure proposal may have enough support to move forward.  Meanwhile, inflationary concerns remain on our radar, as do the potential ramifications on the economy as they continue to resume to normalcy with questions on recent Covid-19 variants. 

Monetary Policy – The Fed Holds Firm

The recent Federal Reserve meeting in June was surrounded with so much fanfare that it was almost deafening. Sure, it was an important meeting, but we have had many important meetings over the last fifteen years. The June meeting felt over-hyped in terms of importance to our team.  Did the markets really expect a “tell” from this meeting?

Chairman Powell remains committed to easy monetary policy and he is confident that inflation remains temporary, influenced by the pandemic and should normalize as the economy continues to re-open throughout the country.   It is our view, the Federal Reserve remains data dependent and it would move sooner to raise rates than year-end 2023, should strong economic conditions persist.  Jobs data seems to be the driver.  The U.S. remains 7.13 million jobs below pre-Covid levels. But the inflationary tug-of-war is creating volatility along the yield curve. The Fed continues to have a critical role during the pandemic, and it will for the next 12-24 months. A healthy and growing economy could have a Fed funds rate back near 2% by year-end 2023 and that is an appropriate level that could accompany healthy GDP growth and inflation levels. Inflation at 5% is running above the Fed’s noted 2% comfort level.  The FOMC’s view continues to be this inflation rate only because of the comparison to the negative rate running this time last year.  Whether they are right remains to be seen.  We believe the economic statistics, going into the Fall 2021, will likely present a more accurate view of jobs.  Of course, if the Fed has played this incorrectly, we can expect very volatile markets.

Fiscal Policy – Yes, there is more, but how much?

The America Rescue Plan Act of 2021 was valued at $1.9T, bringing the total Covid stimuli to nearly $5T.  The proposed US infrastructure plans have been near $3T.  Although, the most recent scaled version is approximately $1T. Because of the composition of the Senate, it seems that anything over $1 trillion, fortunately, will not pass.  We are concerned about rampant spending until the proof of what amount of the $5 trillion is ingested.  We note, the IMF just increased its projection for U.S. GDP growth to 7% which includes more than the scaled down version of the infrastructure plan.  We would expect the IMF’s global growth forecast to adjust to 6% for 2021 and 4.4% in 2022, based upon the vaccine rollout across the world. Therefore, renewed economic growth to be revised upward as well.  

Capital Management Strategies are Restarting. 

Last year, many companies cut their dividends and suspended share buybacks to fortify their balance sheets and preserve capital.  Over the last few weeks, financial services companies have announced share buybacks. After Covid forced belt tightening on typical capital management techniques, buybacks and dividends, both are poised for a comeback.  In fact, companies in the S&P 500 Index are positioned to pay more than $530B in dividends in 2021. Up from approximately $500b in 2020.  

We regularly post market commentary, and it is important to remember that these are short-term views. We adjust respective asset allocations to the individual’s time horizon and risk characteristics.  We thank you for your continued faith and trust in us. Stay safe. Stay healthy. Stay happy.

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