While the rise in COVID cases in the US is worrisome, the markets continued to inch higher in August. In terms of inflation, the July CPI numbers, released mid-August, showed a 0.5% increase since June and a 5.4% increase from last year. Core inflation, which excludes energy and food prices, still rose by 0.4% in July and 4.3% over last year. We continue to believe the rise in prices is transitory, due to pent up demand from the pandemic. However, we continue to be vigilant as we look for signs that inflation may become a longer-term issue.
Stock market valuations remain relatively high and the 10-year yield remains below 1.5% in the bond market. This is a strong indicator against long-term inflation. Similarly, economic earnings this season have come out stronger than anticipated. It is fair to say that valuations are not cheap, but multiples actually retreated as earnings growth outpaced price appreciation over the past several quarters. Beyond the new all-time highs in most equity indexes being set almost daily, the real story of 2021 has been the intense style rotation beneath the surface. The shift toward cyclicals, then to growth, then to bond proxies and then back again to cyclicals has left many managers scrambling to keep up. We believe positioning should remain tilted toward cyclicals as early-cycle dynamics continue to reign supreme into the back half of 2021. Given this environment we do not expect any significant near-term drawbacks in the equity markets and, consistent with our prior recommendations, we suggest remaining overweight risk assets.
As the summer months come to a close, we are looking ahead to the start of season in Naples. We have been busy planning upcoming events, so stay tuned for additional updates. We continue to actively monitor all guidelines for large events and will make accommodations to ensure safe gatherings for everyone. We look forward to seeing you soon.
MONTHLY MARKET COMMENTARY
With the market consistently hitting new all-time highs—the S&P 500 has almost doubled since bottoming on March 23 last year—even the most steadfast investors can find themselves wondering if we’re headed for a market correction. After all, multiples are significantly elevated from their historical averages, the specter of inflation is rearing its head for the first time in decades, the Delta variant is rapidly spreading across the globe and China just embarked on a stinging regulatory crackdown. It almost seems inevitable that the good times cannot last. However, despite the barrage of negative headlines over the past couple of weeks, the equity markets have largely continued their steady climb upwards. Have they simply become complacent to the risks all around us or is there more to the story? We remain resolutely optimistic about the near-term of the capital markets, and we’ll explore some of the factors supporting that optimism…
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