Focus on Investments

What is Driving this Market?

Can anything stop this market?  Slowing growth and a recession certainly could, but are they anywhere on the horizon?

A host of COVID specific federal unemployment benefits are set to expire on September 6th 2021.  Among the expiring emergency benefits is an extra $300 per week of unemployment income.

Federal Aid Slowing?

According to the Congressional Budget Office, the extension of this benefit from March through September added $144 Billion to the federal budget in 2021.  This federal outlay went directly to unemployed Americans and into 2021 GDP.

As this emergency program comes to an end, GDP may be impacted by the loss of federal spending, emergency unemployment income, and subsequent spending by its recipients.

As federal spending ebbs, vehicle sales, new home permits and some commodity prices appear to have already peaked. We’ve included some examples in the chart below.

Has Economy Peaked?

Data
Point

Peak
Date?
Peak Level? Recent Date Recent Level % Change units/source

Total Vehicle Sales

Jan 2021

18.72 Aug 2021 13.46 -28.1%

million units/St. Louis Federal Reserve FRED

Single Family Housing
Permits

Jan 2021

1,268

Jun 2021

1,066

-15.9%

million units/St. Louis Federal Reserve FRED

Lumber
Futures

May 2021

$1,670

Sep 2021

$624

-62.6%

settlement price/WSJ

Corn
Futures

May 2021

$732

Sep 2021

$514

-29.7%

settlement price/WSJ

Copper
Futures

May 2021

$4.762

Sep 2021

$4.277

-10.1%

Settlement price/WSJ

Cattle
Futures
Aug 2021 $131.9 Sep 2021 $124.5 -5.6%

Settlement price/WSJ

 

How might this information impact your near-term investment decisions?  From a financial planning perspective, short and long-term investment results are driven by investor’s allocation to equity (stock).

Since Ibbotson & Associates (now owned by Morningstar, Inc.) started tracking market data in 1926, there have been 94 one-year periods through 2019. Of those 94 periods, 25 have resulted in a loss. So, in the short-term, there is roughly a 1 in 4 chance that a stock investor will lose money in a particular year.

Retirement planning, however, is the discipline of forecasting long periods of time. Consider an investor who retires at age 62 and lives to age 92. This investor must plan for 30 years of income during retirement.

Despite high odds of a market downturn in the average one-year period, the good news is that through 2019, none of the 80 overlapping fifteen-year periods have resulted in a loss (here).

Dot Com Comparisons

That said, there have been periods when stock market valuations have become significantly overvalued.  For instance, the “Dot Com Bubble” of 1999/2000 is widely recognized as a period when many stock prices became euphorically overvalued.

The peak of the Dot Com Bubble essentially occurred in the March 2000 quarter. At that time, the S&P 500 was trading at $1,498 and the S&P 500 as-reported earnings were $50.95.  So, the market valuation at that time was 29.4x earnings (based on trailing price-to-earnings ratio or P/E).

Through the end of the June quarter 2021, the S&P 500 was trading at $4,297 and S&P 500 as-reported earnings were $158.74.  So, the June quarter-end market valuation was 27.1x earnings. Yes, June 2021 valuations are lower than Dot Com era valuations, however, not by much.

What precipitated the market correction in 2000 was the collapse of earnings growth. The years leading up to the year 2000 saw heavy investment into computer hardware & software upgrades (remember Y2K?).

Technology related investment money had been ‘pulled forward’ for fear of 01/01/00 computer failures. Once Y2K came and went without any failures, technology spending declined because so much was spent in the years leading up to Y2K.

Navigating the Road Ahead

Could 2021 be lining up in a similar way?  Maybe, maybe not. The Federal government did authorize roughly $6 trillion of spending between April 2020 and April 2021.

As that flurry of federal spending draws down and eventually ends, spending is likely to revert towards more normal, more organic levels. Thus, it may be prudent to tread a bit more cautiously in the months ahead while remaining focused on your longer-term goals.

 

 

 

 

 

 

Disclaimer
This material is provided by Schmitt Wealth Advisers for informational purposes only.  It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  Opinions expressed by Schmitt Wealth Advisers are based on economic or market conditions at the time this material was written.  Economies and markets fluctuate.  Actual economic or market events may turn out differently than anticipated.  Facts presented have been obtained from publicly available sources (unless otherwise noted) and are believed to be reliable.  Schmitt Wealth Advisers, however, cannot guarantee the accuracy or completeness of such information.  Past performance may not be indicative of future results.

 

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