Developments over the Past Month:


  • Apparently, stocks just go up. Because that’s what they did in August, as it was superlative city again, given that the market has now seen numerous all-time closing highs – fifty-five in 2021 to be exact. The market is on pace for the most ever ATH in a single year (record was set in 1995 at 77). For the eighth time this year, the S&P 500 bounced off its 50-day moving average. Still, year-to-date, the market has not seen a decline greater than 5.0%.



  • Year-to-date, the 10-Yr Treasury yields have marched higher (0.93% on 12/31/2020), though took a breather over the last five months, continuing to drive daily movements in the market, and closed the month much lower around the 1.30% 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 July press conference vs. the relatively hawkish committee projections. During the most recent Fed minutes, Jerome Powell initiated the idea that the FOMC is on pace to begin some form of tapering in 2021. Though, Powell stated that rate hikes don’t always follow the conclusion of a tapering – leaving the door open for continued accommodative policy in the near future.
  • 5-YR Breakevens (market estimated inflation over the next five years) is 2.10%, well below its highs, but 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.
  • Moderate Senator Joseph Manchin stated that he would not support the Democrat’s $3.5 trillion spending bill, nor support spending “anywhere near” that level. And without Manchin’s support, that $3.5 trillion bill is essentially dead, as Democrats need all 50 Senators to back it to pass. Here’s what that means for markets. First, it essentially eliminates any major tax increases before year-end, and that’s obviously a positive. However, it does not eliminate the chances we see any tax increases. The reason why is that passage of the $3.5 trillion spending bill was always unlikely. However, a smaller bill ($1.5 trillion) that is accompanied by small tax increases on corporations and top earners is still possible. But small tax increases on corporations and the very top tax bracket, while not positive for stock prices, wouldn’t be material negatives, either.
  • Jobs data, much like all the current economic data, continues to be mixed – the August Non-Farm Payrolls was the 3rd worst largest miss on record – only 235,000 new jobs (+725,000 was estimated). The market will continue to get more clarity when all of the unemployment benefits roll off and we see schools starting to reopen.
  • Infrastructure Bill – As of writing this, we are almost there. Bipartisan negotiators announced an agreement on the details of their $1.2 trillion bipartisan infrastructure bill, which includes $548 billion of new spending. The bill must go through the House and the Senate – Nancy Pelosi is still lobbying for a larger $3.2T bill (unlikely). It looks like we are still a month away before something gets finalized. I believe that Washington tends to overpromise and underdeliver.
  • From our perspective, earnings season for Q2 2021 has been strong to quite strong. The overall S&P 500 earnings growth rate jumped to 72.3% from 46.3% for the first quarter. All eleven sectors saw earnings growth strengthen, with energy growth flipping positive. From a top-line perspective, revenues have climbed +19% YoY.
  • 2019 S&P 500 operating earnings = $165. Bottoms-up for 2020 = $142 (was as low as $125 in June). 2021 = $197!
  • S&P 500 Fwd. P/E is at 22x. CAPE Ratio is 35x. EAFE is 16x forward P/E, while EM is at 13x. R1V is 17x v. R1G at 31x.


Client Talking Points – August 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’ll wait to see how infrastructure and taxes pan out.
  • 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 (~100bps as of August month-end)
  • Thanks to continued vaccine developments, we believe that there is light at the end of the tunnel, and markets are pricing in a recovery in 2021 propelled by low interest rates. Still, we believe that the best fiscal stimulus the economy can have is an open 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.
  • The first half of the year was led by a bunch of one-hit wonders, i.e., most likely not repeatable – a very dovish Fed, a successful economic reopening, and $8T of stimulus. None of which, are expected in the second half of the year. Moving forward, the market may have to navigate a slew of negative headlines – increased taxes, higher-than-expected inflation, continued supply bottlenecks, and the possibility of a new Fed Chair. All in all, we believe that this can create an environment of increase volatility.
  • 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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