Weekly Investment Strategy

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Labor Market Improvements Should Bolster Spending
• Tech-Oriented Business Investment Not Fading
• Investor Sentiment Toward Inflation Is Shifting

This past weekend, the GOAT (Greatest of All Time) of women’s gymnastics, Simone Biles, notched her seventh US Championship title. Between her never-before-seen tricks, balance, and poise, it would be unsurprising if she is able to become the first woman to win back-to-back Olympic all-around titles since 1968 and the first US woman in any sport to win five gold medals at a single games in Tokyo this summer. This ‘all-around’ strength has also been on display by the US economy, as it is arguably experiencing the GOAT of recoveries from last year’s recessionary decline. In fact, just this week, the National Retail Federation became the latest institution to boost their 2021 retail sales growth forecast. In honor of Simone Biles’ historic seventh win, below we outline seven accolades the economy has earned throughout its remarkable recovery ‘routine’ that portends continued strength.

1. Retail Sales Springing To New Heights | The control group of retail sales—a direct gauge for the consumer spending component of GDP—is up 29.1% on a year-over-year basis. This is the fastest year-over-year pace on record and more than 7x the average over the last 10 years. While extended unemployment benefits will be ending early in 25 states, the monthly Child and Dependent Care Credit payments, which impacts ~90% of US families with children, are set to begin mid-July. After elevated spending on renovations and travel, what may consumers spend on next? Back-to-school sales at department stores are set to spike 25% given that most students learned from home over the last year. Consumers continue to captain the surge in economic growth.
2. Initial Claims Parallel To 30-Year Average | Initial claims have remained below the 400k threshold for two consecutive weeks. But in addition to marking the lowest level of filings since the pandemic began, this week’s report of 376k claims is back in line with the 30-year average of 385k. Although roughly 9.3 million workers are still unemployed, this week’s JOLTS Job Openings report showed a record 9.3 million positions still open. If 6 million of those jobs (~500k/month) are filled over the next twelve months, that will lead to even more spending power for consumers to power this economy to new record highs.
3. Withholding Taxes Round-Off To Record High | Personal disposable income is up 10.5% since March 2020, which is not all too surprising given the aforementioned improvements in the labor market. As a result, withholding taxes, which are an effective real-time indicator for evaluating the trajectory of the economy given it is reported by the government on a daily basis, are now at a record high. This indicates one of two scenarios: either more individuals working or those that are working are bringing home bigger paychecks. In either case, it’s a win for US consumers, who already have an unprecedented ~$2 trillion in excess savings.
4. Execution Of Tech Spending Reflects CEO Confidence | After a year in which many companies suspended forward guidance and reduced capital expenditures, CEO Confidence has since surged to the highest level in nearly 40 years. With record levels of cash on balance sheets, companies have been investing heavily in technology, which has become a critical part of business operations regardless of industry. But what’s even more promising, is that more than 25% of companies are planning to increase tech investment in the months ahead—an astounding percentage given how much companies invested in tech over the last year.
5. Amplitude Of ISM Index Recovery Earns A Top Score | The ISM Manufacturing Index returned to pre-COVID levels in just four months, the fastest recovery during any recession since 1950 due in large part to new orders, which surged to 67.0 from the April 2020 low of 27.1. Elevated new orders and healthy backlogs are a harbinger of continued manufacturing strength moving forward. A noteworthy rebound was also experienced by the ISM Services Index that currently sits at the highest level on record.
6. Housing Prices Yet To Dismount | The National Home Price Index rose at the fastest year-over-year pace since 2005 (13.2% YoY). The steady rise in home prices has been broad based too, with 19 of the 20 tracked cities reporting homes’ appreciated in excess of 10% year-over-year. Home appreciation has been one contributor (in addition to the equity market rally) that has helped household net worth climb to a record $136.9 trillion. Historically, wealthier individuals tend to spend more readily.
7. Inflation Fears Balancing Out | The year-over-year pace of headline and core inflation reached the fastest pace since August 2008 and May 1992, respectively, but fear is no longer the prevailing sentiment as the surge is being viewed not only as transitory, but as a healthy sign of the economy’s recovery. Our view is that inflation pressures will peak in 3Q before subsiding by year end. What has also helped shift sentiment is the reassurance from policymakers and businesses that the supply chain disruptions are being addressed and that pricing pressures should dissipate soon.

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