I hope this week’s commentary finds everyone safe and rested, following some time off spent with family and friends. Summer is over and it is time to get back after it. We should see an uptick in market volume as traders and institutional desks come back online. We may also see some renewed focus on the fundamentals underpinning our economy. I suspect a critical review of just where we are is in order.
Last Friday’s job report was abysmal. The worst since January and compelling evidence that we are far from healed up as a workforce. Despite record job openings and the end of COVID unemployment relief, people are not returning to the labor force. This is a bit of a head scratcher for me in that the moratorium on evictions has been lifted and federal unemployment benefits due to Covid have ended. I am not sure how people think they are going to live without money and a landlord or bank willing to forgo getting paid. While I acknowledge the past year has changed a lot of our thinking about work, careers, and lifestyle – the fact remains that the enhanced government subsidies are officially over, at least for now. I believe that the basic premise of working for a living is still fundamental to this country. At least it is in my house. The idea that Congress is suddenly going to pass new laws that provide for pretty much everything people need to survive is a big stretch for me. At some point soon, the rubber is going to meet the road and a dose of reality is going to get swallowed.
I try very hard to stay out of politics here, and will continue to do so, but there are some structural issues at play right now which could have a profound effect on the public markets. We have a razor thin Democratic majority trying to push through legislation comparable to President Roosevelt’s New Deal of the 1930’s. The $3.5 trillion reconciliation bill is an attempt to fundamentally change this country. There are many compelling arguments for addressing the social and political inequities that are all around us, but make no mistake, the basket of proposed changes will negatively impact the expectations and opportunities of entrepreneurs and business owners. Maybe that is ok and the pendulum of capitalism has swung too far. I do not pretend to have the answers. I do know that investing is all about finding and supporting those who have ideas as well as the grit, determination, and drive to succeed. Anything that diminishes that scares me.
All this and more will come to a head over the next few weeks, as a battle for moral and fiscal ground takes place within the arena that is our Congress. Markets are watching this closely and we will see the results there first. The broad stock indices are treading water and waiting for a sliver of clarity. Bond yields have come off their lows of late July and are right at resistance. A sustained break above 1.40% on the Ten-Year Treasury would be some evidence that investors believe earnings growth can continue through the end of the year and perhaps that the worst of the Delta variant is already on the table. The Dow continues to lag the Nasdaq and to a lesser extent the S&P 500. Mega cap stocks are outperforming smaller companies. For reference the market cap weighted S&P 500 (SPY) is up 6.8% over the past ninety days (June 1, 2021 to August 31, 2021) while the equal weight S&P 500 (RSP) is up only 1.9 %. That divergence alone is a telling sign of investor hesitancy. If we are to power forward from here this needs to change. I would also like to see money flow into cyclicals such as industrials, financials, and energy. The next month is important. Perhaps very important.