
Are we moving toward a more normalized environment?
Over the past week, risk assets are down across the board, even after Tuesday’s (July 20) impressive rebound, as investors are increasingly focused on the likely impact of the Delta variant on the global economy, and the idea of “peak growth”. The former is self-explanatory, and sadly, a reflection of the disparity in vaccine availability across the developed and developing world, but the latter is worth delving into a bit.
With the base effect fading from both GDP (Gross Domestic Product) and earnings growth numbers, we are moving from an environment where the headlines have been eye-popping, toward a more normalized environment, especially as stimulus winds down (about 70% of Federal unemployment recipients will lose their benefits in September), and that could take some of the steam out of the market. The Bloomberg consensus estimate of U.S. real GDP growth for 2021-2023 stood at 6.6%, 4.1%, and 2.3%, respectively, as of June 30th. And according to S&P, 2Q21 operating earnings growth will come in around 64% over 2Q20, but beginning next quarter, those growth numbers will drop off precipitously. All of which helps explain why in the face of inflation fears, the 10-year fell from a high of 1.74% at the end of March to 1.19% as of July 20th (see chart), and the Barclays US Treasury 20+ Yr is up 4.1% month to date (as of July 20th).
While GDP is expected to head back to its pre-COVID, slow growth ways in 2023, analysts are still quite bullish on the earnings environment, with double digit gains baked into 2022 and 2023 estimates.
Certainly, GDP and corporate earnings can disconnect over shorter time frames, but GDP growth is ultimately a cap on earnings growth for corporate America as a whole. Oh, and margins are at or near all-time highs just as taxes, wages, commodities and other input costs, and potentially rates/debt service are all moving higher or are poised to do so[1]. One would think that would give analysts cause for pause.
Sell-side analysts aside, investors are discriminating a bit more in their stock picks, market breadth has dropped noticeably in recent weeks, as overall growth and the reflation trade has come under question.
And just as all these issues are playing out, individual investors’ exposure to equities is nearing the all-time high set during the Tech Bubble, as reported by the Wall Street Journal earlier this week. Keep your fingers crossed!
[1] Refinitiv
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 |
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. |