The national pastime used to be baseball. Go to the park, have a dog, and enjoy a game. As James Earl Jones remarks in the movie, "Field of Dreams," baseball has marked the time and reminds us of all that once was good and could be good again. It seems now, as we fast-forward to today, it seems the national pastime is worry or dread. Worry that the Fed will stop bond purchases. Worry that inflation will rage out of control. Most recently, the new worry is about a "Delta Variant" of the COVID virus. Let's take some of these worries and put them into some context.
First, with regard to the Fed, at some point investors must come to terms with fact that tapering of bond purchases by the Central Bank will begin and accommodative policies must be curbed in order for markets to normalize. The Fed stated earlier this year that they would essentially follow the same playbook that they used after the 2008 Financial Crisis when they began tapering of bond/asset purchases in 2013-14. How did markets survive that existential crisis? From the beginning of 2013 to the end of 2014 the S&P 500 Index was up more than 40%.
Second, we need to look at Inflation. While we take issue with the term "transitory" with regard to describing the current rise in inflation, we do think the spike will recede slightly before ultimately heading higher. Supply chain constraints, pent-up demand, and labor shortages have added to the recent rise in prices. We are seeing some of the first signs of supply chain issues returning to normal. In the last few weeks, Lumber prices, which skyrocketed earlier this year, have dropped 37% since the peak on May 7th. In fact, lumber production has increased 5% over the past 12 months and last week lumberyards reported plenty of supply from the mills. Homebuying has come down and normalized. It will be interesting to see if other commodity-sensitive areas of the economy adjust accordingly.
Last, the worry over a new variant of COVID, affectionately known as the "Delta" variant, is becoming a concern in India and the U.K. PM Boris Johnson is set to announce today that the U.K. might delay full re-opening due to the emergence of this new variant. As of now, this is not a concern here in the U.S. While India and the U.K. are seeing a rise in the variants as they have primarily relied on the AstraZeneca vaccine, here in the U.S., both the Pfizer and Moderna vaccines show 80% or higher effectiveness against the Delta variant. While the U.K. variant currently accounts for approximately 72% of new COVID cases, it only accounts for 5% of new COVID cases in the U.S.
With the strong economic numbers from last week - lower Jobless Claims, higher Consumer Sentiment, and plenty of Jobs available - the U.S. economic picture is in good shape. If Q2 corporate earnings meet expectations, equity prices should steadily move higher.
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