Many of the market themes that we formulated at the beginning of the year have played out close to what we expected. As a brief recap, we expected Fed Policy to be accommodative, Corporate Earnings to be strong, and Fiscal Policy to be somewhat restrictive. These key economic drivers - Fed Policy, Earnings, & Fiscal Policy - represent the 3-legged stool of market expectations. So far, we were correct about the first two, but Fiscal Policy has been somewhat hampered by the deadlock in Congress. This has actually been a good thing for economic growth. We are also on pace with our market projections, with the exception of fixed income and international equities. Rising interest rates early in the year clipped returns for bonds and a rising U.S. dollar has put international equities behind the 8-ball.
Last week's strong Jobs Report will cause investors to closely watch the language in this week's Fed minutes release. Both the ADP private jobs report and the Government's jobs report showed considerable improvement in the labor market. While Unemployment increased, more jobs were added than expected. This could cause the Fed to shift gears on Tapering bond purchases. A market that is hooked on Fed liquidity could see some volatility in trading as investors come to grips with the end of a dovish Fed.
Much is being made of the Delta Variant of COVID. Why is it that viruses mutate into other variants? Mutations often occur so that the virus can continue to spread. When a virus runs into immunity - both from vaccines and prior infections - it must change to infect new hosts. The good news is that mutations often become weaker with each new mutation. We are seeing this with the Delta Variant. So far, deaths and hospitalizations are not increasing with the new variant. In fact, fatality rates under the new variant are 95% lower than under the original strain of COVID. The vaccines have been shown to be more than 80% effective against the variants. More variants will likely occur, but undue concern over the variants is out of order - unless you are the U.S. mainstream media.
Liquidity still abounds in U.S. equity markets. Second quarter earnings projections for S&P 500 companies increased by 7.3% - the highest quarterly increase since FactSet started tracking the figure in 2002. We expect equities to continue to out-perform, but returns may not come as easy. Value stocks and cyclicals are likely to out-perform momentum, growth stocks. Technology stocks are not likely to fall off a cliff, but could under-perform value names the rest of the way in 2021.
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