As I listen to and read about the fears of above-average inflation and rising interest rates I also hear and read about a labor shortage and a shortage of finished product inventory.
- The demand for goods and services is definitely there but the supply is not. Therefore, I believe, the second half of 2021 GDP growth and other economic data will not hit their projected targets, sales will be shy of estimates, while profit margins and earnings will be revised downward. These disappointments will lead to market volatility. It is my opinion, because of poor government decisions, including:
- Energy costs have risen and U.S energy independence has dissipated with the shutdown of the Keystone pipeline and limited drilling on federal lands.
- Immigration at our southern border is raging out of control. This has high negative implications leading to massive increasing costs to support the immigrants, fight the diseases they may bring with them, and fight the cartel criminals entering in the crowds of people.
- There is a strong push in Congress to raise corporate tax rates, personal tax rates that relate to capital gains and qualified dividends, and lower limits for estate tax exclusions.
- Congress is proposing another $1.2 trillion infrastructure plan, as well as a $3.7 trillion economic recovery proposal which will encompass the full Biden administration agenda. That means there will probably be no return on investments for these funds.
- The President’s recent actions on the international stage; lifting sanctions on Iran, not responding to China’s overtures toward Taiwan and threats to those who try to interfere, watching Russia put a pipeline into Europe, to name a few, show the world exactly what to expect these next 4 years.
Corporate executives will decide not to expand their operations in the U.S and deploy capital into increasing their stock buybacks. Many of the companies we own have announced increased buybacks during their first-quarter earnings calls.
If I am correct, GDP growth should slow to 2+% and inflation should also settle at around 2%. With numbers like that, there will be no reason for the Fed to raise short-term rates but they could begin tapering their monthly bond-buying, at least $40 billion, which was the amount they added on March 23, 2020, at the onset of the COVID related economic shutdown.
It seems as though we are getting confirmation of this thesis, as the 10-year US Treasury yield dropped from 1.62% on June 1 to 1.25% intraday 7/8/21.
The bottom line from all of this analysis is interest rates should continue to remain low for some time. Without bonds as an attractive alternative to stocks, the “buy stocks trade” stays on track, and companies with strong cash flows to buy back their shares will be very attractive. Growth will regain momentum as we have seen larger cap, cloud-based companies like Microsoft, Google, Adobe, Amazon, and many other tech-related stocks, move up significantly, in the last 2 weeks. These companies not only have strong free cash flow, but they also are not reliant on raw materials or finished products. They have software that can be turned on when people subscribe. This all makes sense.
We will be listening for corporate executive clues on their prospects for the economy and their sales growth projections in the second half of 2021, as well as, the level of buybacks they are proposing.
Check out John Thur’s past commentary, Is the Market in Hype, Hope, or Realistic Mode?