The economy continued to demonstrate positive growth in the third quarter of 2021, with the U.S. long-term economic growth trend fully on track compared to pre-pandemic levels. Inflation continues to be a concern for many, along with proposed legislation. In our third quarter of 2021 economic update webinar, we discussed market growth, consumer confidence and spending, unemployment rates, and what this all means for your investments.
We can officially say that the recession has ended and was the shortest recession on record. Market indicators show that the economy is booming with the S&P 500, Dow, and NASDAQ all up over 12% for the year. All S&P 500 sectors are posting gains through the third quarter with energy leading the way, up over 42% year-to-date, followed by real estate, financials, and communication services.
Inflation is on everyone’s mind, along with consumer spending. Inflation expectations and the ability and willingness of consumers to spend money tend to be intertwined. We expect these to be the main driving factors for the remainder of 2021. Corporate earnings, supply chains in China, and taxes and fiscal policy will continue to be hot topics, with politics and the debt ceiling playing a big role.
The U.S. has seen an overall positive response to the vaccine, creating less concern for current and future variants. The market impact of the Delta variant was minimal, demonstrating that a global pandemic isn’t enough to stop the U.S. consumer.
Consumer Spending and Confidence
Consumer spending continues to increase in all the same areas it had been growing pre-pandemic. The U.S. saw a decline in spending in some areas (such as clothing and dining out), but those have all recovered and now exceeded pre-pandemic levels. As far as consumer spending is concerned, it’s almost as if COVID never even happened.
Household debt service ratios are at multi-decade lows, indicating that the rate of consumer spending can continue at its current rate. Personal savings rates remain elevated, higher than they have been for the past three decades. Consumers are spending without incurring debt.
Consumer confidence saw a slight decrease due to the Delta variant, but it’s still well over the confidence level at the start of the pandemic.
The leading economic indicators also imply a rapid recovery. GDP increased—it’s up 0.5% over Q2 at 7%. Persistent bottlenecks within global shipping networks have impacted GDP, so while that increase may seem small, it’s a positive sign considering all of the surrounding factors.
Unemployment and the Labor Force
The U.S. continues to see a decline in unemployment claims, with the unemployment rate currently below 6%. Unfortunately, we are not yet at pre-pandemic unemployment levels, but we’re continuing to trend in the right direction. Another positive indicator of the economy being on the right track is the number of people voluntarily leaving their jobs—voluntary separations are at a higher rate than they’ve been in decades. This paints a very positive picture for the U.S. consumer in that people feel confident enough about their futures to willingly change jobs.
Labor force participation, on the other hand, remains mired at multi-decade lows. The number of people who identify themselves as currently working or looking for work is very low compared to past decades. Low labor force participation negatively impacts the economy when there aren’t enough workers to do the work that grows the economy. Conversely, low participation in the labor force also shows the confidence Americans have in the overall economy. If the over 10 million job openings could be filled by getting the workforce off of the sidelines, unemployment rates would fall even further.
Interest Rates and Inflation
Long-term interest rates remain at historic lows, even with the talk of inflation. Despite the headlines telling us that inflation is happening and is going to continue, the bond markets are telling a different story. Interest rates currently are situated with 10-year treasuries hovering at about 1.6%, and a 30-year fixed rate mortgage averages around 2.7%. Historically low interest rates and the low home supply have made for the perfect storm of bidding wars, as we have seen over the past year or so.
The U.S. dollar continues to remain historically strong, telling an opposite story of inflation. The average investment-grade U.S. companies are paying less to borrow now than the US government did for most of the past several decades.
With real interest rates for government and investment-grade debt now negative, investors need to be very selective about where to invest when looking at investing in fixed income or buying bonds.
Corporate earnings continue to exceed expectations, as we have seen companies persistently beat earnings in the first and second quarters of this year. Year over year, earnings growth has been phenomenal for most companies. Where consumer spending goes, corporate earnings will follow, and when high-quality companies are in the money, they will return that money to shareholders in the form of dividends and buybacks. We have seen that stock buybacks have increased significantly year over year, signifying a positive outlook.
Is the market due for a correction? While corrections are a normal part of what happens in the market, averaging one 14% drop annually, it’s difficult to predict a correction. When these corrections do happen, remember to buy low and sell high, not the opposite. Don’t panic and sell with losses; ride out your investments and remind yourself that this is a marathon, not a sprint. Stick to a long-term investment plan in order to realize returns and diversify.
Congress continues to propose legislation affecting investors, businesses, and corporate taxes. For now, it’s all in proposal form, meaning that we shouldn’t make any drastic moves based on ever-shifting information. As soon as any legislation is passed, we will share how these changes may impact you. In the meantime, please feel free to contact us with any questions.