Anna Rathbun, Chief Investment Officer
From retail shoppers preparing for the Holidays months in advance to the businesses placing orders early to prepare for the busy season, Americans seem to have exerted strain on the system by over-preparing together, all at once. The massive global traffic that began upon reopening in mid-2020 has gotten worse, creating shortages and pushing prices all around the world. But underneath the noise of the temporary traffic jam, what would be an organic, normal flow of the global economy? How healthy is the underlying economic engine, how strong are the incentives of the market participants, and how are the markets perceiving the risk and reward that lie beneath? We are asking these questions because the economic reality has come short of our high expectations. This quarter, we would like to share with you what we are seeing in the data and to dream about what we wish to see for a more prosperous future.
Against the backdrop of falling growth expectations, prices generally remained elevated, placing the Fed in a quandary: slowing growth, challenged labor market, but rising prices. Despite the shortcomings in the labor market and reports of missed growth expectations, the Fed turned more hawkish during the third quarter.
In the fixed income markets, year to date, the same low-grade bonds are outperforming safer fixed income securities by a significant margin. With interest rate volatility amidst a friendly corporate environment, 2021 has so far been a friendly environment for high yield bonds.
Overseas, the COVID-19 vaccination status has made tremendous progress with many of the emerging market countries catching up to the developed peers. The improvement in vaccination profiles has increased confidence to reopen, and the enthusiasm showed in the markets.
An interesting phenomenon is taking place as we reopen, where all the excitement about the reopening and economic recovery shows up in business surveys, while for the individual pocketbook, things do not appear so rosy.
Job openings hover near record highs as the U.S.’s reopening has employers scrambling for workers they lost during the shutdowns. American workers, however, have not been desperate to find jobs – in fact, they are downright dropping out of the workforce altogether.
Typically, we expect an inflationary environment with growth-related enthusiasm at the start of a new cycle, but the current observation points to rapid rise in prices with growth lagging behind.
For the foreseeable future, elevated prices have a definite impact on margins and pocketbooks, as we have seen real income growth for Americans trend downward. So it is not surprising to see the University of Michigan consumer sentiment on current conditions as well as expectations back down to near pandemic lows of 2020.
In a globalized world, issues in our country may not be isolated to us. Our developed friends overseas, especially Europe, continued to reap the benefits of reopening, only to be faced with the same headwind as the U.S.: shortage of supply due to clogged logistics
What would we need to see in the next few months for a little more optimism? We would love to see consumer sentiment head north and to catch up to the expansionary business sentiment. We hope to see labor force expand again with Americans in the prime of their life finding their way back into the work force. There are some reports that we may be past the worst in the supply chain debacle, and we certainly hope that is true. And with the reported savings and paying down of debt, Americans could be facing their future with a more robust personal balance sheet. More stability in personal finances will hopefully translate to more confidence in spending, which can combat a deflationary potential in our economy. While we ponder a future avenue for growth, we acknowledge that the current path out of the pandemic is turning out to be longer and more twisted than expected, and it is also requiring more patience from us.
For more information on the third quarter financial market activity, please contact CBIZ Investment Advisory Services.
The information included in this update is provided for informational purposes only and should not be construed as investment advice. The views expressed are those of the author based on the data available when this update was written and are subject to change based on market conditions or other factors. CBIZ Investment Advisory Services disclaims any liability for any direct or incidental loss incurred by applying information supplied in this update.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.