As Goldman Sachs raises its 2021 target on the S&P 500 from 4,300 to 4,700, further fueling investor sentiment, concerns of new cases and hospitalizations caused by the Delta variant have taken a backseat under a new norm. (Mozee) Although a hybrid work model may avert the need for an economic shutdown, the road ahead could reveal fragility in the U.S. economy. This month’s issue of The Samra Report focuses on several variables and provides insight as to their impact on the U.S economy and Global Financial System.
At Samra Wealth Management our outlook for the next several years is bullish, however, strained trade relationships with China and the Delta variant have exposed vulnerabilities. According to the Center for Infectious Disease Research and Policy: With vaccinations reaching a critical point, declines earlier this year serves as proof that the virus and variants can be stopped, but confusion, complacency, and inconsistently applied public health measures are driving transmission. Dr. Anthony Fauci warned that upcoming coronavirus mutations could be even more contagious than delta, which has a viral load about 1,000 times higher than the alpha variant. With a Delta Plus variant detected in South Korea, Americans should consider themselves on notice to fear the unknown.
Numerous factors play a role in the spread of covid, for example proximity to a travel hub and state population density. A positive correlation between state vaccination rates and new covid cases by population indicates those states with conservative leadership, prioritizing constitutional rights and religious freedoms over science and human rights, have experienced the greatest uptick in new cases as a percentage of population. A deeper dive into the numbers further indicates a correlation between state education ranking and vaccinations, where New Jersey, Connecticut and Massachusetts, the highest ranked states for education by Education Week Research Center, average 12 new covid cases per 100,000, whereas Mississippi, Louisiana, Alabama and neighboring Florida average 68.5 new cases per 100,000. Further concerning as the latter states have a statistically significant lower population density.
As the Delta variant continues to rage, the Biden Administration’s plan to stimulate the economy focuses on an infrastructure spending bill, and student loan deferment. In a low interest rate environment, where skilled and intermediate workers are profiting from the hybrid work environment, the refinancing of debt and ability to reroute student loan payments towards mortgage principal payments, aids in widening the wealth gap. The hybrid work environment has also spawned a shift from real estate in urban areas to the suburbs, prompting the question, “are we in a real estate bubble?” With negative real rates, and an under supply of single-family homes, investors are less concerned with a housing bubble, and focused on how long rates can stay low. Although there’s little rationale for the argument, that rates must go up, at Samra Wealth Management, we believe low rates have been necessary given the fragility of the economy.
In a domestic economy, should the central bank raise interest rates, relative to foreign economies. The domestic economy in this case would experience an influx of capital, pushing up the relative strength of the domestic economy’s currency, offsetting foreign trade. In our current scenario, low interest rates help to ensure domestically produced goods are accessible in global trade. At Samra Wealth Management, we believe interest rates will start to tick-up in November, due to an announcement by the Treasury, it could begin cutting the size of government debt sales in the fall, as funding needs for economic relief efforts ease, in a move that would pave the way for the first reductions in five years. We believe the Fed is likely to follow suit in its April meeting, as talks of tapering start to solidify.
A rise in interest rates, combined with a tax increase could deal a blow to select sectors in the near term, specifically: Healthcare, Technology, financials, industrials, and consumer discretionary, prompting a change in our sector rotational strategy. However, although we expect interest rates to rise moderately in Q4 into Q12022, we believe the Fed’s plan will be contingent on unemployment, as it emphasizes returning to pre-pandemic levels, while keeping an eye on run away inflation. We expect short-term inflation to increase, given pent up demand and supply-chain constraints due to logistics and shortages. We further expect the above-mentioned sectors to recover swiftly given the go-ahead of an infrastructure spending bill, and increased stimulus measures.
Conservative investors in search of yield, in an interest rate environment where the 10-year fell below 1.14% in July, and the real interest rate (10-year U.S. Treasury indexed for inflation) fell to -1.19%, a multi-decade low, need to rethink their investment strategy. (Fred.stlouisfed.org) A conservative allocation weighted heavily towards fixed income, places these investors at increased risk, as interest rates start to rise while prices of bonds fall. At Samra Wealth Management, we expect increased volatility across asset classes over the next 12-months, suggesting a managed strategy is likely to outperform that of passive investments.
Last Revised: August 5, 2021
Disclosures:
This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results.
All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.
Investing involves risk including loss of principal.
Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC
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