US GDP numbers are coming out on Thursday this week. If the estimates hold, the economy will improve +8.7% over last year’s 2nd quarter reading. We know that last year was the depths of the COVID shutdowns and that the economy is not 100% back to where it was prior to COVID, but this is a big number nonetheless. Previously, we have discussed how this quarter will be the peak of the numbers that we will be seeing from a year-over-year (YOY) perspective. Looking at the chart above, we can see better what this means. While the economy will continue to grow (according to the estimates), the growth will temper as time goes by. Goldman Sachs came out this morning and updated their forward looking guidance to say that by the second half of 2022 we will be seeing GDP growth back on the long-term trend line.
The long-term trend line is between 1.5%-2% GDP growth. The US has been around that trendline for some time now. We go above it and below it sometimes, but always we return to it. Projected GDP growth is a function of the rate of technological change, the growth rate of capital, and the growth rate of labor. The growth rate of labor in the US has fallen significantly as the Baby Boom generation has begun retiring and the next birth cohorts are not large enough to pick up the slack. The US has plenty of capital and so any increase in capital (capital deepening) only goes a little way to increase our GDP. That leaves us with technological innovation. Luckily, the US has been a global leader in this area, but that only brings us up to a 1.5%-2% projected GDP growth rate for the foreseeable future. Without an uptick in labor supply, there is little chance of the US breaking out of the projected GDP growth trend.
Corporate earnings are on the same trajectory down in terms of YOY growth. Earnings are more volatile than GDP and so the chart below has a wider range, but you can see the same effect. Earnings peaked from a year-over-year basis last quarter and will be back to a sense of normalcy after 2021 is over. These are all estimates and are subject to change, but without COVID clouding the picture, analysts should be able to get a better feel for the actual earning power of companies.
What does all of this mean? The market is healing. We will most likely see normal market movements, including volatility, in the back half of this year and going forward. Broadly, equity markets have been just going up since the end of COVID, and this is not normal. Expect to see some down months here and there. Since the end of COVID, the S&P 500 has had 3 down months out of 15 possible. Of course all of this can change with an exogenous shock, but don’t be surprised by some sideways movement and even some minor pullbacks. The markets are coming back toward normal functioning, and that is good.
Quote of the Week
|These he blends with spiritual practices, such as meditation for stress release and “energy audits” to help founders realize what tasks sap them of energy. Those tasks must be delegated, he says. By taking his advice, executives can find their “zone of genius,” and learn how to run a company well, he said in a Zoom interview from his home in Kauai, Hawaii.|
Excerpt from a profile by Kate Clarke on Matt Mochary – a leadership consultant for CEOs of up-and-coming tech companies like Coinbase and Robinhood. The article didn’t elaborate on how energy-sapping the CEOs’ subordinates would find their newly delegated tasks.
Past performance is no guarantee of future results. Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill. Prior to June 2014, Fortunatus Investments was a wholly owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
There were no trades in the Fortunatus models during the week ending on July 24th, 2021. The major equity market sectors remain in a long-term favorable trend, and the Fortunatus Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.
On a Lighter Note
Since the beginning of time, man has wondered what secrets lurk in the deep, blue sea. It had always appeared to be fathom after fathom of unfathomable mystery. That is until now. Recent research from the University of Baylor indicates that “The History of the Oceans Is Locked in Whale Earwax.”
Since there are no flipper-friendly Q-tips and whales are relatively large and long-lived, they accumulate a lot of earwax. These buildups contain any pollutants ingested by the whales and record spikes and dips in their stress hormones. Now, the scientists had a clear history of the animal’s many moods. For instance, they discovered that some whales were blue while others just couldn’t get over the hump. The researchers were able to chart data going back to the 1870s thanks to thousands of whale earwax plugs collected by curators of natural-history museums as part of, quite possibly, the world’s least appealing hobby. This waxy surplus allowed the scientists to be meticulous and thorough in their journal article, although some colleagues claim they forgot a cetacean or two. Nevertheless, at the very least it was more enlightening than their earlier attempt to unlock the history of British empire by looking at the earwax of Wales.
Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities. EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email. For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor.
Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on July 16, 2021 to closing price on July 23, 2021
1 Month = closing price on June 23, 2021 to closing price on July 23, 2021
3 Month = closing price on April 23, 2021 to closing price on July 23, 2021
YTD = closing price on December 31, 2020 to closing price on July 23, 2021
All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.
Copyright © 2021 Executive Wealth Management. All rights reserved.