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Core Comments Quarterly Newsletter

Updated: Oct 11, 2021

July 12, 2021 Our lives have continued to improve since last quarter economically and socially. Most Covid restrictions have been rescinded in the US, but we are about to watch the first Olympic Games without fans! Much of the world is still in crisis with both Covid infections and the slow process of getting their populations vaccinated. In the US we got close but did not exceed the 70% vaccination goal set by President Biden. It is surprising that there are so many who continue to decline the vaccine in the face the growing outbreak from the Delta variant that is starting to fill ICUs in many parts of this country. The difference this time is that the hospitalized patients are largely young and unvaccinated. While that is good news for those vaccinated, we are hearing from Pfizer that they believe a booster will be necessary for the Delta variant and for the natural time-based decline in efficacy of the original vaccine. It was speculated from the beginning that we might need annual Covid shots just like for the Flu.

Uncertainty is a major element of markets and economies and Covid represents another form of uncertainty. We are used to surprising movements in economic variables, weather, and politics on an annual basis. Covid is more like a “Black Swan Event” as it was improbable and had massive consequences for economies and the social fabric of the world unlike the related viruses SARS and MERS which appeared in the recent past but did little damage. Covid remains a serious question mark for our economy and social lives, and it is a little early to put it behind us!

Unemployment and the number of unfilled jobs present another uncertain situation distorted by Covid. This quarter the unemployment rate declined 0.1% to 5.9% which represents just over 9 million people. The JOLTS survey of Job Openings shows that there are over 9 million non-farm job openings. Why does this large gap persist, it could be the people are not where the jobs are, or they do not want their old jobs back due to Covid concerns, or maybe they have gone back to school, and perhaps some are taking advantage of the enhanced Federal unemployment benefits which expire in September. Whatever it is it is slowing the pace of recovery especially in certain low wage industries. The Federal minimum wage remains at $7.25, and it is doubtful that congress will raise it and why would they as wages have risen on their own to $15 an hour in most of the country. Low wage employers are offering signing bonuses and still do not have the workers they need.

Inflation is another factor distorted by Covid and the economic collapse it caused bottomed in terms of prices in the second quarter of 2020. That has led to a dramatic increase in prices over the last twelve months leading to June’s year over year rise of 5.4%. For example, the WTI price for a barrel of oil was $11.57 on April 21, 2020, $39.46 on June 30, 2020, and $71.80 on June 30, 2021, which represents an 82% increase. Overall energy, which also includes electricity and natural gas was up 24.5% for the year so these other components moved very little. The real question is will this rate of increase continue or will it subside as the Fed claims. Inflation affects all of us differently depending on what it is that we consume. Senior citizens consume more medical care while young families consume more food. Now oil is up the most so the budgets of those who drive a lot are in danger. They also may suffer from the lack of chips which has cut the numbers of new cars. Their prices are at the high end of their range and used cars and trucks are also rare and as such high priced. These issues are transitory and should work themselves out. For many years we have lived with inflation at 2% or less, so the real concern is what happens if it shifts up to 3% or more. Hopefully, we do not have to find out.

The stock markets continued rising with segments rising from 3.6% and 8.5%. Large Cap domestic stocks regained the lead and Growth took the lead from Value by a significant margin leaving Value investors to ponder if the last six month was all the get. Interest rates fell during the quarter causing the Aggregate Bond Index to rise 1.8% offsetting a portion of the 3.4% loss suffered in the first quarter. This move runs counter to what one might have expected given the inflation situation and seems to predict a weakening economy. Finally, the flies have not found the ointment as the vaccines continue to be effective and stock market valuations continue to be high if not expanding.

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