In this week’s Monday Market Insights, we discuss the recent bounce in Chinese share prices, the current status of the Infrastructure Bill, and the Fed’s Jackson Hole Symposium. Our Chart of the Week provides a look at historical valuations for stocks and bonds over recent decades. Finally, we discuss positive testing results for COVID-19 and what they might foretell as to hospitalization rates over the coming weeks.
Returns Table
| Equities | Week(%) | YTD(%) | 1-Year(%) | 3-Year(%) | 5-Year(%) | Div Yield |
|---|---|---|---|---|---|---|
| S&P 500 | 0.6 | (0.8) | 26.1 | 24.25 | 17.94 | 1.22 |
| Russell 1000 Value | 1.2 | 1.5 | 22.7 | 16.79 | 11.35 | 1.77 |
| Russell 1000 Growth | 0.0 | (3.5) | 23.4 | 30.79 | 23.83 | 0.64 |
| Russell 2000 | (0.8) | (3.1) | 3.3 | 16.00 | 11.25 | 0.94 |
| MSCI EAFE | (0.5) | 0.7 | 10.3 | 12.91 | 9.74 | 2.51* |
| MSCI EM (Emerging Markets) | 3.7 | 2.9 | (4.0) | 11.03 | 10.03 | 2.38* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | (0.3) | (1.5) | (1.9) | 4.21 | 3.16 | 1.98 |
| Bloomberg Barclays US High Yield – Corporate | (0.2) | (0.6) | 4.6 | 7.50 | 5.93 | 4.45 |
| Bloomberg Barclays Municipal Bond | (0.7) | (0.9) | 0.7 | 4.30 | 3.74 | 1.31 |
| Bloomberg Barclays Global Aggregate x US (Country) | 0.3 | (0.3) | (5.8) | 2.44 | 2.94 | 1.15 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | 6.2 | 9.9 | 55.3 | 17.0 | 9.3 | 82.6 |
| Natural Gas (NYM $/mmbtu) Continuous | 16.6 | 21.6 | 59.8 | 13.7 | 5.1 | 4.3 |
| Gold NYMEX Near Term ($/ozt) | 0.1 | (0.0) | (0.9) | 12.4 | 8.8 | 1,827.2 |
| Copper Cash Official LME ($/mt) | (1.2) | (0.2) | 21.1 | 17.7 | 10.9 | 9,665.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.13 | 1.24 | 1.22 | 1.15 | 1.07 | 1.14 |
| Japanese Yen per U.S. Dollar | 115.79 | 115.16 | 104.20 | 108.41 | 114.03 | 114.85 |
| U.S. Dollar per British Pounds | 1.36 | 1.35 | 1.36 | 1.28 | 1.22 | 1.37 |
Chinese Shares Bounce
Emerging Markets equities have lagged in 2021, with the Index up just 0.4% through last Wednesday’s close, vs. 20.8% for the S&P 500. This is in no small part due to the fact that Chinese equities, which make up roughly 35% of the EM Index, have declined by roughly 4.0% (Shanghai Shenzhen CSI 300 Index) over the same time period. In last week’s narrative we spoke about the steps the Chinese Communist Party was taking to move away from the free market leaning policies of previous regimes. The first target of these changes has been Chinese tech companies, which have performed miserably in 2021. Using the Kraneshares CSI China Internet Fund (ticker: KWEB) as a proxy, the shares have declined by over 50% from their 2021 highs in February. As is often the case when things go to extremes, a bounce from oversold levels can unfold swiftly. That occurred last Tuesday when KWEB advanced nearly 11% in one day due to strong earnings results from certain Chinese tech companies, coupled with the hope that the recent pace of new Chinese regulatory efforts might slow. While investors with Chinese equity holdings clearly welcomed this news, we continue to take a very measured view of the events unfolding in China as it relates to our Emerging Markets exposure.
Infrastructure Bill moves closer to law
Passage of the roughly $1 trillion infrastructure bill hit a tiny snag last week, when Speaker Pelosi refused to advance the legislation. The bill had already passed the Senate, but still requires approval in the House before sending it off to President Biden for his signature. The holdup related to the timing of a vote on the budget blueprint for the much larger ($3.5 trillion) reconciliation bill. Progressives within the Democratic party had indicated they would only vote for the Infrastructure bill after the blueprint had been passed. Nine holdout centrist Democrats, however, demanded that the Infrastructure bill be approved first. Speaker Pelosi hoped to have this standoff resolved Monday evening, but that timeline slipped to Tuesday when a deal was reached to bring the Infrastructure bill up for a vote no later than September 27, 2021. Given the bipartisan support for this legislation, we have every belief the Infrastructure bill will soon become law. Looking a bit further out, the far more consequential legislation for financial markets will be the reconciliation bill. While that legislation is in the very early stages, we believe it will be scaled back from the advertised price tag of $3.5 trillion. Still, it will be massive, and is slated to include tax increases for corporations and high-income earners. We will be closely monitoring the reconciliation bill, along with its potential impacts for the financial markets, and will have much more to say on that front in the coming weeks.
Jackson Hole
While the U.S. economy has steadily recovered over the past year, the Federal Reserve (Fed) continues to provide ongoing support via massive amounts of liquidity. The Fed has done this by purchasing $80 billion in Treasuries and $40 billion in mortgage backed securities each month. This has resulted in a ballooning Fed Balance Sheet which currently stands at over $8.3 trillion, nearly double where it stood in early March of 2020. Recently, FOMC members have spoken about the need to reduce, or taper, the current level of monthly bond purchases. This narrative has started to lay the groundwork for the upcoming reduction in bond purchases, no doubt with the hope that the ample notice avoids a “taper tantrum” similar to what occurred in 2013 when bond yields spiked higher. At present, the markets believe bond purchases could be dialed back as soon as late this year, with some expecting this could be delayed if the recent COVID-19 case count continues higher. Added clarity may arrive on this topic at the Fed’s Jackson Hole Symposium (last Friday, August 27).
Historically Speaking – Assets appear richly priced, but bonds more so than stocks
The first chart above shows the average P/E ratio for the trailing twelve months for the S&P 500 broken down by decade. The lower chart details the “P/E” (100 divided by the 10-year Treasury yield, or, recently, 100/1.25%) for bonds.
The valuation of both asset classes is significantly above the levels we have seen over the past 60 plus years, particularly so for bonds.
For stocks, the higher valuations are supported by the paltry yields available on bonds.
Said another way, given the current yields available on Treasury securities, each dollar invested loses value relative to inflation (negative real return) every day. This continues to lend credence to the argument that for an investor seeking to grow the real value of their assets, there is no alternative to stocks.
Then too, based on forward-looking earnings for the S&P 500, the P/E would equate to roughly 20.7x next year’s earnings. While still a bit high compared to long-term averages, much less so relative to the recent past.
While we are cognizant of the historically elevated stock market valuations, we remain steadfast in our belief that given available alternatives, equities remain the better option for growing wealth and outpacing inflation.
Positive COVID-19 Tests Rolling over, Hospitalizations to follow?
One of the recent concerns on Wall Street has been the increase in COVID-19 cases, with particular attention being paid to the Delta variant which is more easily transmitted and is believed to be more deadly.
The chart above shows the positivity rate of COVID-19 tests in the United States since last June and then compares that to the rate of hospitalizations (lagged by two weeks).
As can be seen from the chart, there has historically been a very tight correlation between these data sets, which if it holds in this instance, would point toward hospitalization rates declining very soon.
It also should be noted that the United Kingdom and India recently experienced a Delta Covid-19 surge, which lasted around 45-50 days. Were this timeline to hold within the United States, we would be nearing an end to the recent surge.
From an investment perspective, if the data points listed above accurately foretell what lies ahead over the coming weeks, the economic impact of this recent surge within the United States should be contained.
