Quote of the Week
“Start by doing what is necessary, then what is possible, and suddenly you are doing the impossible.”- Francis of Assisi
Last week, the markets were up a little shy of +1.0% except for the Nasdaq, which was flat.
S&P 500 earnings grew 89.3% in the second quarter compared to the second quarter one year ago. This is an aberration in earnings growth because the second quarter of last year was the first quarter of the COVID-19 shutdown.
There is not much in the financial markets that is newsworthy. The big issue financially on investors’ minds is whether the rise in inflation is transitory or the start of a permanent trend. Inflation increased 0.3% last month compared to 0.9% for the month of June. Used car prices increased only 0.2% after rising more than 10.2% in June. The sector that grew the most was lodging which was up 6.8%. Lodging makes up almost one-third of the Consumer Price Index. It is hard to know what rental rates will do once the rent abatement expires in October. We could see a big increase in rental prices.
The performance of our portfolios for the last two months has been slightly disappointing. We have moved from Quad II (rising growth and inflation) to Quad III (declining growth and rising inflation). This process has been taking place over the last two months. When we have a change in Quadrants, it doesn’t happen over one day. It is a blending process where what was working in Quad II starts to flatten and fail and what works in Quad III starts to gain traction and moves up. The change in the mathematics is gradual. This will always be the case when the Quadrants change. It takes a period of time to get fully invested in what works in the new quadrant.
The following came from Hedgeye, our data provider.
Trendspotting: Did Employment Rise in States that Cut Benefits?
Neil Howe NEWSWIRE: 8/13/21
According to a new study, states that reduced unemployment benefits early haven’t seen a hiring boom. Who gets hired, however, has changed, with fewer teens and more workers over 25. (The Washington Post)
NH: In June, 20 Republican states reduced their pandemic unemployment benefits early. Governors believed this would decrease their states’ stubbornly high unemployment rates. (See “Is Labor Force Participation Down for Good?”)
So did people return to work? It’s hard to say. All of the states that cut benefits in June did so after the BLS conducted their unemployment survey for the month. Thus, we have to look at the July results to see if there was any effect.
In July, nonfarm payrolls increased by +943K, and the unemployment rate fell from 5.9% to 5.4%. Both those readings were better than expected. This might seem to suggest that cutting benefits had an impact. But the BLS won’t release individual state data until the beginning of September. Thus, we can’t be sure the employment increase is coming from these 20 Republican states. There could be another driver at play. And a new paper by Gusto, an online payroll company for small businesses, suggests just that.
By analyzing company accounts for June, Gusto concluded there wasn’t an overall increase in employment in states that cut benefits. There was an increase in employment for those ages 25+, but this was offset by a decrease in teen workers. So, yes, more adults have returned to work in these states, but it hasn’t led to job growth.
Over the last month, I have become more and more skeptical that benefits are the primary driver keeping people home. Instead, it seems that Covid-19 may still be the main reason. An estimated 26M Americans have Long Covid. And in an extensive global survey, 22% of respondents with Long Covid reported not working due to their symptoms. At the same time, approximately 1.5M Boomers retired early in 2020. (See “Pandemic Forcing Boomers Into Retirement.”) I suspect both of these drivers largely explain the 3M people missing from the labor force.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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