Economic Growth Weakens While Inflation Rises
Why may we see economic growth continue to weaken in the coming months?
- Delta Variant upsurge causes consumers to pair back spending
- Unemployment benefits ending
- Hurricane Ida effects
- Looming government shutdown
Why may inflation continue to rise?
- Material shortages
- Labor shortages
- Supply chain delays
In our view, we believe that COVID will be a primary market catalyst.
Has the upsurge in the Delta Variant peaked?
It appears that in the short-term this MAY be the case.
Source: The New York Times
So, if it appears the Delta Variant is POSSIBLY peaking, what is there to be concerned about?
- Schools back in session may reverse this.
- We are moving into the cooler months, so more people will be indoors.
Due to the spread of the Delta Variant late summer, we expect that momentum from the early part of the recovery will continue to erode. You can see below the Atlanta Fed’s GDPNow Model showing a deceleration in their GDP forecasting estimates since May 1st. Their estimate slowed from 6.4% for Q3 to its current rate of 3.6%.
In speaking to many of our clients who are near or in retirement, most are staying home. Staying home generally means they are not spending as they normally would.
Data from DestinationAnalysts.com, a travel research firm that analyzes key traveling data, proves this point. Their latest survey highlights the extent that US consumers are panicking due to the Delta Variant upsurge.
- 59% of travelers are concerned about the Delta Variant
- 27% cancelled their trips
- 34% postponed their trips
Has this effected the performance of the airline and leisure stocks?
The Delta Variant has had a direct impact on the performance of these stocks. Please review data below versus the S&P 500.
- Marriot -3.87%
- Carnival -18.27%
- JETS Airline ETF -18.85%
- S&P 500 +13.69%
As you can see, while the S&P continues to perform well, many key airline, travel and leisure stocks diverge from the S&P, which we think is a direct result of fears over breakthrough COVID cases. Furthermore, the Reuters/University of Michigan Consumer Sentiment Index is showing its lowest reading since 12/2011 (next page).
What does this mean for investors?
A simple formula to summarize:
Rising COVID cases=dovish fed that stalls tapering=low rates=market continue to make new highs (especially the speculative parts of the market).
Declining COVID cases=less dovish fed that begins tapering=rates move higher=markets correct (quality parts of the markets will do well).
The following are the key messages we ALWAYS want to get across to our clients.
- Nobody with complete 100% accuracy can time markets. The reason why this is so important to understand is if you tilt your portfolio in a way that follows a narrative that you believe will occur, AND DOES NOT OCCUR, it can really hurt your long-term performance.
- Predictions/Analysis from Wall Street firms about COVID or ANY EVENT are exactly that, predictions, not GUARANTEED TO OCCUR. Optics from large institutions many times look promising, but even their greatest market analysts do not get the narrative consistently correct.
- There is no PLAYBOOK for the current environment we are in.
- The best strategy is to remain properly diversified, ESPECIALLY in an environment where valuations for ALL RISK ASSETS ARE EXTREMELY STRETCHED. Also, remember that stretched valuations ALONE do not kill a bull market, A CATALYST is needed.
- Rebalance when there are dislocations in markets that you are invested in. Right now, stock values in many investors’ portfolios are greater than they normally are. Now is the time to reduce some of that risk. Not because you are TIMING THE MARKET, but you need to be consistent in the level of risk you take.
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Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.Airlines, Charting, Delta Variant, Economic Growth, Federal Reserve, GDP, Government Shutdown, Hotel, Inflation, Market Timing, Travel, Unemployment