Gill Capital Partners Late-July 2021 Update
Summer is in full swing, and the mountains, beaches, and lakes are packed with travelers looking to enjoy some relaxation, adventure, and fun with family and friends. We hope all of our friends, clients and partners are healthy, safe and able to partake in some summer fun. This is often a quieter time for financial markets, with many people taking extended vacations and adopting a more laid back summer vibe. However, we have plenty of global developments to discuss, including fears of a resurging virus, corporate earnings, and a move lower in interest rates (yes, you heard that right!). We will get into all of these issues and provide our views on them, but first, some Olympics-related humor…
Coronavirus Reemergence
Sadly, we are seeing a fairly serious resurgence of the virus in parts of Asia and many parts of the U.S. Both cases and hospitalizations are rising in states including Missouri, Florida, and Texas, which now account for 40% of all coronavirus cases in the U.S.
The more highly infectious and dangerous Delta variant is now the dominant strain globally. While cases are rising even among the vaccinated, hospitalizations and severe respiratory illness continue to be more prevalent in the unvaccinated population. The rapid rise in cases last week spooked markets, with the U.S. stock market seeing its worst day since October.
Our view – This is not the news anyone was hoping to see. It appears we are going to be dealing with the virus and its variants for a protracted period of time. More importantly, however, is how our society reacts to episodic spikes in cases. Our investment committee discussed this subject recently and believe that there is very little appetite within the U.S. to lock the country down again. Furthermore, given that hospitalization and death rates are very low among the vaccinated, we believe the U.S. will stay on its path toward reopening. Masks mandates may become more prevalent and the unvaccinated segment of the population may have more restrictions, but in general, we do not see broad lockdowns or a shuttering of the economy coming. We are concerned about the possibility that schools are not able to remain open for full in-person learning, particularly given the prevalence of the highly contagious Delta variant.
Corporate Earnings Update
We are roughly a quarter of the way through a strong earnings season. Overall earnings are now expected to grow 76% year-over-year, the highest rate of growth since 2009. This is not necessarily a surprise, as we are seeing growth rebound from a historically unprecedented economic recession. Most analysts believe this is likely the “peak” of earnings growth. However, estimates are continuing to call for growth in the third and fourth quarters, just at a slower pace.
Our view – One interesting data point is that profit-margins are holding up. Investors have been terrified by historical price increases in the cost of raw materials and wages. So why are margins holding up? While companies are reporting higher costs, they have so far been able to offset these costs by raising their prices. Most U.S. households find themselves in the best financial position in a long time, given elevated household savings and a strong labor market, and are well positioned to absorb rising costs. We may not like it, but we will deal with it for now….
Why Are Interest Rates Moving Lower?
You may have noticed that the benchmark 10-year U.S. Treasury yield has moved significantly lower over the past few weeks, from a high just under 1.8% in March to a low near 1.15% on Monday, July 19th. That is a huge move down in rates, especially in the face of soaring inflation. Shouldn’t rates be moving higher, not lower?
Our view – Conceptually yes, rates should be moving higher, but there are other factors at work. We see two main drivers of lower interest rates in this environment: liquidity and coronavirus fears. As we have said previously, banks and financial institutions are awash with cash and have a huge appetite for fixed interest securities. The extremely high demand is pushing bond prices higher and interest rates lower. Also, the resurgence of virus fears drove a strong “risk-off” environment that pushed yields lower. It is counterintuitive, but the Federal Reserve has clearly stated that they are not raising interest rates any time soon, and all of that money has to go somewhere.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.