AVP Wealth Portfolio Manager | Johnson Financial Group
As Assistant Vice President, Wealth Portfolio Manager, Kelsey works with clients to achieve their unique goals and objectives.
4 minute read time
At the beginning of the pandemic, I constantly heard the phrase “the new normal” used as a way to accept and cope with our new way of being. Work from home, virtual school, and drive-by birthday parties were a fact of life with no return to normalcy in sight. Thank goodness those days are coming to an end.
Now, headlines read that National Parks are turning away visitors not because they are closed but because they are crowded; rental car prices are surging; and restaurants are unable to hire without offering thousands of dollars upfront in sign-on bonuses.
There is nothing normal about this, either; however, we have come to accept this as well.
Despite these new challenges and opportunities, we have recently seen second-quarter business confidence increase to new levels as seen in the chart below. This should drive capex spending and an increase in consumer spending, especially in the services sector. There is still pent-up demand to spend, which is driving inflation higher. This is seen in increasing TSA checkpoint numbers, air travel spending, and foot traffic in hotels and casinos. As we enter summer vacation season, we anticipate continued robust demand from consumers and commensurate upward pressure on price levels.
Lumber is another area of the economy that has been synonymous with the inflation narrative. Since its peak, lumber futures have declined about 50 percent as production has begun to catch up with demand. This imbalance is proving to be temporary and is a precursor to what we expect more broadly in the economy as the economy works out its supply and demand kinks.
Because of these quick changes affecting the economy as the world recovers from one of the shortest recessions on record, sector rotation within the equity markets has also been accelerated.
As we know, volatility in risk assets is inherent, and the equity markets are always fluctuating. It is rare to see the same sector outperform year after year. In other words, it is “normal” to see a different asset class leading the pack each year. Year to date, we have seen commodities lead due to increasing inflation as shown in the chart below. But as supply and demand kinks get worked out, we think stocks are more likely to lead commodities, rather than the other way around; and it's not like stocks have been sleepy, in any case. On Friday, the S&P 500 hit its 31st all-time high of the year.
Source: Cornerstone Macro (as of 6/14/21)
While we believe equity valuations are supported by better than expected company earnings, positive vaccine news, and low interest rates, we continue to recognize the importance of diversification. Over the past year, we have seen a rotation from growth-oriented sectors such as consumer discretionary and technology into cyclical stocks such as financials and energy as well as international and small cap stocks.
Within our balanced approach, small tactical moves in portfolios can help capture shifts in the economy. For example, we are currently seeing more fair valuations in both developed and emerging markets rather than in the mega-cap tech stocks. Our equity positioning is opportunistic, and we believe there is still opportunity in specific areas of the equity market despite this “new normal” of hitting all-time highs.
We continue to be optimistic about the recovery but are keeping a close eye on the inflation story. In Brian Andrew's May 27 commentary, we noted that continued stock appreciation may be limited given the outstanding returns since the bottom. On Friday, we will receive the June jobs report which will give us increased clues about the economic recovery. Increased equity volatility is expected if we begin to see a reversal of reopenings due to the Delta COVID variant, or if we see surprises in unemployment, inflation, or interest rates.
As we close out the second quarter, we will also look to see how companies report earnings and what kind of “new normal” is in store for stock prices and valuations.
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