Expectations for Boomy Growth Sink!

July 31, 2021

By Mitchell Anthony


The 2nd quarter was great yet again for equity markets, but volatile for expectations for the US Economy. How quickly the outlook can change – Boomy growth expectations from CEO’s and Market strategists that were plentiful at the beginning of the quarter were nowhere to be found by the end.  Leadership in the equity markets adjusted accordingly as secular growth companies (Tech, ecommerce, services) found renewed leadership and cyclical value oriented names fell from top to bottom as the quarter unfolded. Inflation spiked as the sleeping consumption giant awoke hungry and found the kitchen in a poor state of supply with modest inventory.  The Fed’s patient posture toward inflation is certainly under the microscope and is the center of worry for investors.

The Markets

Equities had another great quarter, along with fixed income returning to favor.  Boomy growth expectations moderated causing the speculative rally in Commodities to stall and the rally in bonds to begin.  The First half of the quarter was good for value names and deep cyclical names (Oil, Banks, Restaurants, transportation, etc), but ultimately the leadership shifted.  The 2nd quarter leadership was led by a surge in previously Hard hit pandemic reopening names (Energy, REITs), and a shift back to Secular Growth Names.  Indeed growth stocks did well in the second half – Russell LC Growth IWF +11.7%,  Nasdaq 100 QQQ +11.1%, SP 500 up 8.5%, CIC DG + 7.9%,  with value lagging – Russell 1000 Value IWD + 4.7%.

Leadership in equities involved Tech, Energy, REITS, Comm. Services, and Healthcare, along with strong performance in Residential Real Estate. Most REITS were up 13% or more in Quarter with an even bigger rebound in Commercial Property – SPG – +14.7%.   Fixed Income bounced with long treasuries TLT +6.6%.  The sharp move in Commodities in the prior quarter mostly ended in Q2.  Most notable was the fall in Lumber off 58% from April peak.  Commodity Speculators seem to have pulled plug on their liquidity pump as capacity on the production of many commodities returned and the most severe Bottlenecks were relieved.  The outlook for demand decreased in Q2 also driving speculators out.

The Economy

As expected the do everything from home theme faded a bit cooling durable good demand as demand for consumer experiences bounced back strongly. Housing which had been white hot ebbed a bit with demand moderating.  Headwinds developed as rapid movement in prices caused some buyer hesitance driven further by: Low Inventory, mild decline in Covid 19 nesting, tighter credit, and the continued foreclosure moratorium limiting inventory.  Still great Tailwinds to note: Money is still cheap even though rates have tilted a bit higher, this combined with strong consumer balance sheets have bolstered affordability. Further moderation in boomy expectations came into focus alongside other factors including: Less stimulus – One time payments gone and enhanced unemployment benefits gone for 25 states with further reductions to come by September.  Pulled forward demand for durable goods is also now waning and industrial names are out of synch with volatile demand. Still notable, however, is that Consumer Confidence has moved to 127 which is near its all-time high of 142. Indeed, consumers are generally in strong financial positions with elevated savings levels. However, it seems they may not be rushing to spend this all at once.

The reopening of America is well underway Despite a 3rd wave of the pandemic that may threaten America and is already entrenched in UK and other areas of globe with the new cases in the UK approaching all-time highs. This despite Vaccination rates of over 50% in the US and UK and affirmed vaccine protection against new strains of the Virus. Go Figure!  Stimulus is still abundant but expected to end as all of those in need have had solutions and a return to work is now needed.  The US Economy is strong with US retail sales at all-time highs.  Personal income is still very high but far off highs of Q2. Personal Consumption is just off all-time highs as durable good purchases appear to have peaked.  The Industrial Sector is moderating as demand for durable good consumption has fallen but the inventory build is still in place. The Auto Industry is ebbing and flowing with strong demand but choking from bottlenecks in semiconductors. Energy demand is tilting higher as capacity remains tight, but cracks at OPEC are developing, as domestic producers exercise discipline. Appliance demand is high but declining as inventory is arriving just in time! 5G Construction continues, but the Biden Infrastructure plan is moderating in size. The Renewable energy theme is underway with demand for Electrics, Solar and other green infrastructure.

The Experience industry is in the midst of a steady strong rebound that is coming slower than anticipated. Pent up demand is visible for Leisure related flights, Hotels, Restaurants, & Entertainment. However, No real visible recovery yet in: Business related flights, and Hotels, & Dining.  Secular Consumption of Tech remains intact with strong demand for hardware, semi’s  and software services. The Financial Sector is still hoping for higher rates and improved margins on loans.  The recent decline in expectations for boomy consumption was a big blow to bank investors!  There is conflicting opinions on the longevity of the Inflation we are experiencing. Continued stimulus and low rates are building a scenario for enduring inflation. However, the Fed does not believe current consumption themes are sustainable enough for demand pull inflation to develop for any extended period of time.  Inflation is transitory. Gold prices indicate that investors are not believing much inflation lies on the horizon.

Economic Outlook

The robust Boomy recovery in America is not materializing.  Consumer experiences are leading the modest to moderate wave of consumption. Housing and durable good consumption has moderated but will have a second wave of acceleration.  Technology demand will continue with work and do everything from home still alive. E-Commerce will continue to grow. Return to the office is underway but competitive forces are involved. Goldman Sachs is demanding a return to the office while Citibank says work from home for as long as you like in a strategy to poach talent from the King.

Market Outlook

Most Risk assets will remain highly valued and trend higher. Stocks and Real Estate will undoubtedly move higher but leadership remains unknown….Some Risk assets that are highly valued will tilt lower. Treasuries and High quality debt are in this risk basket.  Commodities that have run up because of Covid capacity problems and incrementally higher demand are also in the bucket.  Steel, Grains, etc.. Leadership in Equities will change. FAANG, Consumer experience cyclical, and Industrials will likely lead.  The FAANG will go again as earnings ignite new purchases.  SIFI Names (Sexy Innovative Fragmented Industries) will surprise to upside and downside as earnings and the rate environment play out. Late to the party REITs could be in for a run as well as gold if the fed gets to stubborn and the data surprises us all.

We remain optimistic