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Market Commentary | Aug 4, 2021

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“Operation Slow Growth” making a comeback?

The first release of second quarter U.S. Gross Domestic Product (GDP) growth came in at 6.5%, according to the Commerce Department. This pace is slightly higher than the 6.3% rate in the first quarter, but nowhere near the consensus of about 9% or the Atlanta Fed’s pre-release GDPNow forecast of 7.4%. Explanations for the miss centered around inventories that are expected to rebound in Q3, and economists were heartened by better-than-expected consumer spending (11.8% vs. 10.5% estimate.). In addition, the level of GDP surpassed its pre-pandemic high (see below). The Bloomberg consensus GDP estimate at the end of June for 2023 had already fallen back to 2.3% before this miss. And as a reminder, real GDP[1] growth averaged just 2.3% from the end of the last recession in June of 2009 through calendar year end 2019, just before the pandemic hit. Despite recent continuous quantitative easing (QE) and trillions of dollars of stimulus, the Bloomberg consensus expectation is that we’re going right back to the slow growth environment that we had before. Oh, and seemingly nobody cares. The market is up.

A probable contributing factor to a resumption of “Operation Slow Growth” is the fact that the ratio of births per death in the U.S. inched its way closer to one last year, with 25 states recording more deaths than births, according to the CDC and reported by the Wall Street Journal.


Number of Births Per Death, U.S.

But to be fair, that’s a longer-term issue that likely has no material impact on the present. And what we know about the present is that:


  1. Manufacturing continues to be on a tear

  1. Services are still expanding but have cooled a bit presumably due to the Delta variant and the lack of labor

  1. With 69% of companies reporting through August 2nd, S&P noted that 88% beat on both sales and earnings. Earnings are only expected to advance by about 3.4% from the first quarter, but by fully 83% from the second quarter of last year. And that’s on an operating basis, that is, excluding all the non-recurring bad stuff that tends to reoccur about every quarter. On an as-reported basis, which plummeted last year because, well, you know, bad stuff, 2Q earnings are estimated to be up 163% from 2Q20. Exciting times to be sure.


As it is month end, a recap of asset class performance is in order. With the yield on the 10-year ending the month at 1.24%, down 21 basis points (bps) from the prior month, REITs and long-term Treasuries led the pack, returning 5.1% (Wilshire US REIT) and 3.8% (Bloomberg Barclays US Treasury 20+), respectively. The S&P 500® also turned in a respectable 2.4% return, and the MSCI EAFE advanced by 0.75%, while emerging market equities were taken out behind the woodshed due to China’s crackdown on media, food delivery and education related stocks. The MSCI Emerging Market Index fell by 6.8%, making it the worst performing equity segment for the month. Small cap equities also suffered, with the Russell 2000 off by 3.6%.


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[1] Real gross domestic product is the inflation adjusted value of the goods and services produced by labor and property located in the United States.

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Wilshire US REIT
Measures U.S. publicly-traded real estate investment trusts and is a subset of the Wilshire US Real Estate Securities IndexSM(Wilshire US RESI)
Bloomberg Barclays U.S. Treasury 20+ Year
Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity
S&P 500
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
Measures the equity market performance of developed markets outside of the U.S. & Canada
MSCI Emerging Markets
An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe

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