Developments over the Past Month:

  • Stocks continue to chop between the 4050 – 4300 SPX range that they have been trapped in since mid-April – though, it ended the month on the higher end of this level. A second meme stock rally has filled the news headlines in an otherwise quiet two months of trading. Like equities, bond yields are in a similar holding pattern.



  • Year-to-date, 10-Yr Treasury yields have marched higher (0.93% on 12/31/2020), though took a breather over the last three months, continuing to drive daily movements in the market, and closed the month lower around the 1.50% level.
  • The Fed promised that rates would remain in the 0% – 0.25% range through 2023, with the goal of stoking inflation to moderately exceed 2% for some time. Fed Chair Powell seemed more dovish in the press conference vs. the relatively hawkish committee projections. He opened the door to a discussion on QE tapering, but noted that the U.S. is still not at the “substantial further progress” standard that would allow policy normalization. Powell called this the “talking about talking about meeting”. The Fed dots (forecasts for future fed funds) rose from the zero bound in 2023, but Powell noted that there is a large amount of uncertainty over the next 2 years.
  • As far as “reasons” the 10-year yield is increasing, we believe this can be attributed to the introductions of President Biden’s Build Back Better infrastructure program of nearly $4 trillion in spending over the coming years. That, combined with the continued acceleration of vaccine distribution, we believe is pushing growth and inflation expectations even higher.
  • 5-YR Breakevens (market estimated inflation over the next five years) is 2.40%, well above the Fed’s desired 2% threshold. Remember, Powell said the Federal Reserve would let this run hot for a bit, i.e., above 2%. Ultimately, the yield curve is pricing in higher inflation expectations. However, we believe that the market is pricing in a normalization of rates, as the U.S. remains the only country still below its pre-COVID 10-Yr interest rate level.
  • The G-7 made an agreement to impose a minimum tax deal on multinationals of 15%. This deal is being pushed by Treasury Secretary Janet Yellen. Implementation though is no guarantee. We’d expect other countries will simply wait and let the U.S. take the lead. In summary, we believe the odds of a tax hike occurring this year have substantially declined since April.
  • 25 states have announced that they will eliminate enhanced Federal benefits ahead of its scheduled expiration in September.
  • From our perspective, earnings season for Q1 2021 was excellent. The overall S&P 500 earnings growth rate jumped to 46.3% from 33.9% for the first quarter. All eleven sectors saw earnings growth strengthen, with energy growth flipping positive. From a top-line perspective, all but the Real Estate sector saw improvements.
  • 2019 S&P 500 operating earnings = $165. Bottoms-up for 2020 = $142 (was as low as $125 in June). 2021 = $185.
  • S&P 500 fwd. P/E is at 23x. CAPE Ratio is 36x. EAFE is 17x forward P/E, while EM is at 14x. R1V is 18x v. R1G at 29x.

Client Talking Points – July 2021

  • President Biden outlined the biggest expansion of the federal government matched with the largest tax increase since 1968. Biden senses the post-COVID era is a once-in-a-generation opportunity to massively restructure US fiscal, monetary, and social policy. In our opinion, this is a big experiment.
  • We have expected bond yields to reflate as the pandemic improves and economic activity begins to normalize. The spread on the 2s and 10s has historically expanded as wide as 300 bps (~140bps as of June month-end)
  • Thanks to continued vaccine developments, there is light at the end of the tunnel, and markets are pricing in a recovery in 2021 propelled by low interest rates. Still, the best fiscal stimulus the economy can have is reopening the economy.
  • This is not a normal economic cycle, which is caused by financial excesses. This may help explain the stealth recovery in asset prices (along with the Fed flooding the markets with liquidity).
  • Should a successful vaccine allow for the resumption of normal economic activity, our expectation is that rates will continue to rise, and market leadership will shift away from Tech Growth into more downtrodden components of the market.
  • We feel it will be worth watching the general trend of economic and fundamental data, and when it will begin to decelerate. It’s tough to get better than the best. Are we already at peak growth, and what happens after peak growth?
  • Longer-term, we believe valuations and bond yields will eventually matter, and both will lower expected returns for balanced portfolios. 



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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. 

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The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. 

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. 

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities. ACA-2107-1.