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M&R Capital Management 2Q2021 Market Update - John Maloney

July 1, 2021

An economic boom coupled with moderating interest rates propelled equity prices higher in the second quarter of 2021. The ten-year Treasury yield eased to 1.49%, after rising sharply in the first quarter, from .93% at year end 2020 to 1.74%. The Federal Reserve at least for now remains committed to an expansive monetary policy, despite growing signs of price inflation, while the Federal government continues massive new fiscal programs that have supercharged demand for goods and services. This is likely responsible for the anomaly of lower long-term yields as the economy enjoys growth levels not experienced in decades.

The economy in the second quarter is expected to register 6.8% real growth, according to Goldman Sachs. The strength of the economic rebound from the dire conditions experienced at this time last year was clearly unexpected by most business executives, resulting in supply chain disruptions, labor shortages, and higher prices for most everything.

For example, United Airlines just made it largest ever plane order, after freezing such orders in early 2020. Further, car rental companies sold much of their fleets during the pandemic, resulting in a shortage of cars to rent now, and soaring rental prices. Across the board, companies struggle to meet increasing demand as shortages of parts and workers to fill open positions hobble production. Meanwhile, the prices of virtually all commodities, from aluminum to copper, corrugated boxes to polyethylene have risen sharply and are in short supply.

Buoyed by low mortgage rates and tight supply, home sales have reached their highest level since 2005. But unlike the activity prior to the great recession of 2008, home buyers are in strong financial condition, with good credit and elevated stock portfolios. The current expansion should be prolonged, as the supply of new homes still lags demand, and millennials move from their parents’ basements to their own homes.

One might reasonably ask, “What can go wrong?” as underlying conditions for equities have not been so favorable in years. The answer would appear to be a fear of price level increases not seen in decades. The Producer Price Index jumped +0.8% in May, seasonally adjusted, and has gained 6.6% in the twelve months ended in May, which is the largest increase recorded since 2010. The Consumer Price Index also recorded its largest jump (+5.0%) since 2008, as price increases begin to impact consumers. While these increases are substantial enough to caused concern, much of the jump in prices can be attributed to an artificially lower base of prices caused by the downturn during the pandemic, and the supply bottlenecks we discussed earlier, which should slowly dissipate in the second half of 2021. If this view turns out to be accurate, the Federal Reserve will not be forced to abruptly raise interest rates, which neither the economy nor the equity market would likely absorb with equanimity.

For now, we see conditions for a continuation of the bull market in stocks as favorable, even as investors rotate between sectors, and “toggle” back and forth between growth and value, depending upon factors such as the movement in interest rates. While these sub-surface movements are significant, we would concur with the sentiment expressed in a 1963 speech by John F. Kennedy, who said, “A rising tide lifts all boats.”

Hoping you are enjoying your summer, I am,


John E. Maloney



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