Hello Legacy Wealth Alliance Family,
As we approach Memorial-Day and the unofficial start of Summer in the U.S., American’s are expected to travel in droves over the holiday weekend. With 61.8% (1) of adults in the U.S. having received at least one dose of the COVID-19 vaccination, and recent downgrades of CDC travel restrictions for fully vaccinated individuals, summer travel is expected to surge. As of May 26th, Arizona is lagging the nationwide vaccination averages with 45.6% (2) of individuals having received at least one dose of the vaccine. The current expectations are the U.S. will have enough vaccinations to inoculate the entire adult population by the end of May (3). We hope those of you intending to travel over the weekend have a safe and enjoyable holiday! Personally, I will be taking a road-trip up to St. George, UT to enjoy some camping and hiking around the Red Cliffs. For those of you without plans this weekend, please enjoy our market commentary.
Coupling the success of the initial vaccination rollout with personal savings rates in the U.S. at 10-year highs and pent-up demand for domestic travel and leisure, the economy has experienced a recent pick-up in activity (4). This is a trend we expect to continue into and through summer. In addition to improved economic activity, the Fed continues to stick to its policy of zero percent interest rates further incentivizing consumer spending. That said, zero percent interest rates are not the only tool the Fed has deployed to help see the economy through the pandemic driven crisis of the past year. They have also been purchasing $120 billion of Treasury and mortgage-backed securities each month, a strategy that Wall Street refers to as “tapering”. This is all with the goal of keeping the cost of capital low for consumers and corporations and ensuring fully functioning credit markets. Last week we also learned from the release of the April 2021 Federal Open Market Committee (FOMC) meeting minutes that some Fed members think it is time to at least begin talking about a plan for slowing the pace of “tapering”. That slight shift in Fed sentiment was enough to concern markets last week as investors contemplated the possibility of the Fed’s very accommodative monetary policy ending sooner than expected. Through everything we are hearing, we do not expect a meaningful change in Fed policy over the coming months, interest rates are expected to remain close to zero percent through 2022 and by some analysts accounts into 2023. The Fed’s primary focus right now remains reducing unemployment rates which are currently at 6.1% (6) before considering increasing interest rates. That being said, we believe uncertainty around the direction for monetary policy longer-term will persist and that uncertainty will continue to attribute to market volatility.
Another contributor to market uncertainty are the current Biden administrations stimulus plans – the American Jobs Plan and American Families Plan. The two plans are aiming to increase corporate taxes (from 21% to 28%), and individual tax rates on income earners making more than $400,000 of income or having north of $1,000,000 in investment related capital gains. The proposed increase in taxes would support the administrations aims of increasing family tax credits, educational and healthcare support. With congress adjourning over a portion of the summer, we do not expect to receive more clarity on the direction of either stimulus plan until August or September creating further uncertainty in the domestic equity markets. Historically, any changes to tax legislation is implemented as of January 1st, meaning we don’t anticipate any changes to the federal tax rates in 2021.
The last and certainly not least of the topics we are monitoring is inflation. While inflation is expected to jump over the next year or so, consensus from the analysts we track is around 2.5% over the next decade (5) with normalized inflation projected over the long-term. Higher inflation has historically brought equity valuations down, which is another reason the markets have seen increased volatility recently. But for now inflation remains at the Fed’s “Sweet-spot” level right around 2%. As more data is released later into the year pointing towards increased inflation, this could lead to increased volatility in the markets.
Looking into the remainder of 2021, we feel there will continue to be opportunities in the market, as there always are. The biggest trend we’ve seen so far this year is the shift back to value companies outpacing growth companies that excelled in the stay-at-home environment of 2020. We expect this shift to continue through the economic recovery although innovation focused companies (usually growth firms) will always have opportunity that we do not try to time. Hence we recommend owning both. We wish everyone a blessed and safe Memorial Day weekend especially those who have served or have loved ones that have served for our country!
- Arizona Department of Health Services
- Evercore ISI
- Bureau of Labor Statistics
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may not be realized and may differ materially from actual events or results. Past performance is not indicative of future performance.
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