
“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:
- Manufacturing continues to be on a tear
- Services are still expanding but have cooled a bit presumably due to the Delta variant and the lack of labor
- 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%.
[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.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
© Morningstar 2021. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and is available on our website www.frontierasset.com.
Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
INDEX |
INDEX DESCRIPTION |
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 |
MSCI EAFE |
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 |