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May 2021
Market Update
(all values as of 09.30.2024)

Stock Indices:

Dow Jones 42,330
S&P 500 5,762
Nasdaq 18,189

Bond Sector Yields:

2 Yr Treasury 3.66%
10 Yr Treasury 3.81%
10 Yr Municipal 2.63%
High Yield 6.66%

YTD Market Returns:

Dow Jones 12.31%
S&P 500 20.81%
Nasdaq 21.17%
MSCI-EAFE 12.90%
MSCI-Europe 12.10%
MSCI-Pacific 13.80%
MSCI-Emg Mkt 16.80%
 
US Agg Bond 4.44%
US Corp Bond 5.32%
US Gov’t Bond 4.39%

Commodity Prices:

Gold 2,657
Silver 31.48
Oil (WTI) 68.27

Currencies:

Dollar / Euro 1.11
Dollar / Pound 1.33
Yen / Dollar 142.21
Canadian /Dollar 0.73
 

Macro Overview

Inflationary pressures increased throughout the economy recently, as the price of raw materials required for consumer products ranging from bread to automobiles rose in cost due to short supply and growing demand. Commodities including wheat, copper, corn, lumber, and steel are essential for the production and manufacture of consumer products, whose rising costs are passed along to consumers in the form of higher prices.

Markets reacted to proposals aimed at raising capital gains taxes and widening the reach of estate taxes. Small business owners are expected to be affected if the proposals are passed, although some analysts believe that markets will tolerate a tax increase without any significant repercussions.

The proposed tax hikes by the administration are primarily targeted at those earning over $400,000 by raising the top rate on ordinary income from 37% to 39.6%. Capital gains would be taxed as ordinary income for taxpayers earning more than $1 million. Wealth transfer is expected to become more costly as estate taxes and exclusions on home appreciation are also being considered by the administration.

The Commerce Department reported that the U.S. economy grew at an annual rate of 6.4% in the first quarter. The Federal Reserve commented that the economy is heading into a period of faster growth and job creation, yet still remains vulnerable to a spike in COVID variant cases should it occur. Companies continue to struggle in finding workers for posted positions, with nearly 7.5 million jobs unfilled. Economists note that some workers have been deterred by generous state and federal unemployment benefits.

Projections by the International Monetary Fund (IMF) place global growth at an annualized rate of 6% this year, as pent-up demand drives growth. The IMF emphasized the risk of virus mutations outpacing vaccinations as a potential threat to the global economy.

Census data released by the Census Bureau for 2020 reported a U.S. population growth of 7.4% since the last Census in 2010, with a total of 331,449,281 U.S. residents as of April 1, 2020. The Census results shifted state representation in the House of Representatives, with states including California and New York losing seats while Texas and Florida gained seats.

Sources: Federal Reserve, Commerce Dept., U.S. Census, Tax Policy Center

 
federal debt will be nearly 200% of GDP by 2050

Bond Markets Acknowledge Inflation – Fixed Income Update

Rates stabilized in April, following a steep ascent in the prior month. Government bond yields, along with mortgage yields, dropped slightly as the Fed continued to purchase mortgage and Treasury bonds at a rate of $120 billion per month, providing liquidity and encouragement for a low-rate environment.

Inflationary pressures are increasingly a focus for bond markets as consumer prices rise. Treasury Secretary Yellen indicated that rates may need to rise to prevent the economy from overheating. The 10-year breakeven inflation rate, a closely-followed metric for bond markets, rose to 2.41% at the end of April, signaling an inflationary trend. Historically, the Fed has started to taper or reduce stimulus efforts once inflationary pressures are validated. (Sources: U.S. Treasury, Federal Reserve)

Equities Maintain Upward Momentum – Domestic Stock Market Overview

Strong company earnings and economic data helped propel equities higher in April, along with abundant liquidity provided by the Fed in the form of bond buying. Improving economic data has helped maintain equity valuations, as investors anticipate expanding growth across the economy.

The potential effects of proposed increases in capital gains may be relatively muted since roughly only 25% of U.S. stocks are in taxable accounts, while the balance are in retirement and pension accounts where capital gains tax is not applicable.

Higher prices on numerous consumer products contributed to rising profit margins for many companies, translating into higher earnings and elevated stock prices. Comments by Fed Chair Jerome Powell on April 28th suggested that parts of the market “are a bit frothy,” alluding to potentially overpriced valuations. (Sources: S&P, Bloomberg, Federal Reserve)

National Debt As Percentage of GDP – Fiscal Policy

Three rounds of stim­u­lus spend­ing to com­bat the coro­n­avirus and its eco­nomic affects con­tributed to a nearly $4.5 tril­lion in­crease in fed­eral debt held by the pub­lic, raising total debt to $21.9 tril­lion as of March 1, 2021. Existing federal debt is now the high­est since World War II and exceeds the size of the nation’s entire economic output, as measured by Gross Domestic Product (GDP).

Congressional Budget Office (CBO) forecasts project that the nation’s debt as a percentage of GDP will continue to increase for the following 30 years, with debt reaching nearly 200% of GDP by 2050. Various factors are taken into account when calculating future debt estimates, including economic activity, tax revenue and government spending. (Sources: CBO, Federal Reserve)

 

 
2020 Census show the U.S. population grew to 331,449,281

IMF Lifts Estimates For Global Growth – Global Economy

Widespread vaccinations across the globe, along with continued liquidity provided by central banks, prompted the International Monetary Fund (IMF) to revise global growth projections higher. The IMF expects developed economies to be less affected than emerging economies by the pandemic, which has taken a heavy toll on countries including India and Brazil. Smaller emerging economies reliant on tourism have lost significant amounts of revenue and jobs as international travel essentially came to a halt over the past year.

In addition to economic projections, the IMF also posted other findings, including population demographics and humanitarian data. It found that roughly 95 million people have fallen into extreme poverty over the past year, due in part to the pandemic. It also identified an additional 80 million people worldwide who are defined as malnourished. In its Global Financial Stability Report, the IMF cautioned that the excessive use of central bank intervention and massive government debt issuance may produce unintended consequences such as inflationary pressures for consumers on a wide scale. (Source: IMF)

U.S. Census Reshapes Congressional Seats – Demographics

Every ten years the U.S. Census Bureau conducts a count of U.S. residents, which is used to determine funding and resource allocation for government programs. The Census Bureau count reallocates seats in the House of Representatives based on population changes among the states. The reallocation of seats is known as apportionment, a process that divides the 435 seats in the House of Representatives among the 50 states. This process is mandated by the U.S. Constitution under Article 1, Section 2, which requires a census and apportionment every ten years.

Results from the 2020 Census show that the U.S. population grew to 331,449,281 as of April 1, 2020, a 7.4% increase from the 2010 Census, the slowest population growth rate since the Great Depression. The states that gained seats are Texas, Colorado, Florida, Montana, North Carolina, and Oregon. Seats were lost for California, Illinois, Michigan, New York, Ohio, Pennsylvania, and West Virginia. Seat appointments are critical for politicians as they strive to pass and halt particular bills and legislation affecting everything from taxes to benefit payments. (Source: U.S. Census;CB21-CN.30)

 
home prices rose roughly 12% from February 2020 to February 2021

Home Equity Surpasses $21 Trillion – Housing Market Overview

With home prices rising roughly 12% from February 2020 to February 2021, home equity levels also increased, producing wealth for millions of homeowners. Elevated equity has allowed homeowners to remodel and improve existing homes, resulting in further home value increases.

A tight supply of homes nationwide added to rising home values as growing demand for homes produced competitive bidding on houses. A lack of inventory tends to have the impact of locking homeowners into their homes for extended periods as they upgrade and modernize.

A closely followed gauge of housing prices, the S&P/Case-Shiller U.S. National Home Price Index, saw the largest increase in 15 years, as home prices hit new highs throughout most of the country. The data found that the lack of new homes spurred heightened demand for previously-owned homes. Rising home values typically translate into rising equity for homeowners, which in-turn enhances household wealth, credit availability, and consumer confidence. Economists view these characteristics as supportive for an economic recovery, allowing for more borrowing and spending. (Source: Federal Reserve; //fred.stlouisfed.org/series/CSUSHPINSA)

Chinese Government Introduces Its Own Cryptocurrency – Global Currencies

The recent popularity of digital currencies is a topic of attention for central banks worldwide. Still in the exploratory stages, central banks including the Federal Reserve have not yet accepted cryptocurrency or digital currency as a valid form of monetary transactions. Traditional currencies issued by sovereign countries, such as the U.S. dollar, the British pound, and the Chinese yuan, continue to be the primary currencies used for financial transactions globally. China’s introduction of an electronic currency is expected to enable its government to more easily conduct surveillance of its citizens and their everyday transactions. Unlike bitcoin and other widely used digital currencies, government-issued electronic money can be tracked and identifies who the spender is.

Some economists note that a digital Chinese currency could be a strategy for China to begin dislodging the U.S. dollar as the world’s dominant currency. The U.S. Treasury and the Federal Reserve have both acknowledged that an electronic yuan, China’s currency, could eventually become a threat to the dominance of the U.S. dollar. Sanctions imposed by the U.S. upon various countries could potentially be rendered impotent without the dominance of the U.S. dollar. The Bank for International Settlements estimates that 88% of all global trade is currently transacted in U.S. dollars. The Chinese yuan currently accounts for only 4% of all transactions. (Sources: Peoples Bank of China, Federal Reserve, U.S. Treasury, Bank for International Settlements)

 

*Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.