Resist Inflation Complacency

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 20, 2021

Some analysts and investors breathed a big sigh of relief on inflation when it was reported last week that the Consumer Price Index rose 0.3% in August versus a consensus expected 0.4%. But we think any sense of relief is premature.

First, in no way, shape, or form, is a 0.3% increase in consumer prices indicative of low inflation. Consumer prices rose at a 3.3% annual rate in August, which is still well above the Federal Reserve’s 2.0% target. Yes, we are well aware that the official Fed inflation target is for the change in the PCE deflator, which always runs a little lower than the increase in the CPI, but it doesn’t run anywhere close to 1.3 points lower, which is what it’d have to do for the Fed to hit the long-run 2.0% inflation target.

Second, a number of sectors had price declines in August that should not persist. For example, airline fares fell 9.1% in August and are now 17.4% below the average fares of 2019, which was pre-COVID. So, as COVID gradually recedes these prices should rise.

Third, housing rents are likely to accelerate sharply in the years ahead, including for both actual tenants as well as owners’ equivalent rent, which is the rental value of homes occupied by homeowners. With the eviction moratorium in place, rents have grown unusually slowly for the past eighteen months. But, going back to the 1980s, rents tend to lag the Case-Shiller home price index by about two years. Now, with the national eviction moratorium finished, look for rents to make up for lost time. And because rents make up more than 30% of the overall CPI, anyone predicting lower inflation numbers in the future are saying other prices will fall.

Ultimately, however, it’s important to recognize that inflation is still a monetary phenomenon and the M2 measure of the money supply is up about 33% since February 2020, pre-COVID. Eventually, that will translate into a substantial rise in overall spending or nominal GDP (real GDP growth plus inflation) and since the Fed has little to no control over real GDP growth beyond the short-term, that means higher inflation.

One way to think about it is that between the late 1950s and early 1990s, the ratio of nominal GDP to M2 hovered in a narrow range very close to 1.8. What that means is that every new dollar of M2 translated into 1.8 more dollars of spending. And if the ratio remains the same, then a 10% increase in M2 leads to a 10% increase in overall (nominal) spending.

This ratio rose in the 1990s. Interestingly, so did real GDP growth. So, the strong real growth of the 1990s was actually associated with lower inflation. Since then, the ratio of GDP to M2 has generally dropped. Immediately prior to COVID, in the last quarter of 2019, the ratio was 1.42; now it’s 1.12. What this has meant is that M2 growth has not translated directly to inflation.

However, let’s assume the ratio is headed back to the 1.42 that prevailed just before COVID. If nominal GDP normally grows 4% per year – 2% real GDP growth plus 2% inflation – it would take six years (so, 2027) to get back to that 1.42 ratio. But that’s only if M2 doesn’t grow in the interim. No change at all. More likely, M2 does grow in the interim and that additional growth feeds through directly to higher inflation.

Another way to think about it is that the ratio of nominal GDP to M2 has dropped because the velocity of money has fallen. That’s the speed with which money circulates through the economy. It’s hard to see velocity falling further from 1.12 because to do so means eventually going below 1, and that has not happened in any recorded history of the US.

The Fed meets this week and will be issuing its usual statement after the meeting. We don’t anticipate any significant changes to monetary policy at this meeting, although we do expect a hint that the Fed will announce a tapering of quantitative easing to begin after the next meeting in early November.

However, the Fed will also be releasing a new set of economic projections as well as projections about the path of short-term interest rates. Back in June, the Fed was forecasting that inflation would be back down to roughly 2.0% in 2022. If they make a similar forecast this week, it will be a sign that it isn’t taking upward inflation risk nearly as seriously as it should.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

9-21 / 7:30 am Housing Starts – Aug 1.550 Mil 1.545 Mil 1.534 Mil

9-22 / 9:00 am Existing Home Sales – Aug 5.880 Mil 5.950 Mil 5.990 Mil

9-23 / 7:30 am Initial Claims – Sep 19 320K 326K 332K

9-24 / 9:00 am New Home Sales – Aug 0.711 Mil 0.728 Mil 0.708 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Stocks Versus the Economy

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 13, 2021

If you’ve read our two most recent Monday Morning Outlooks, you know we raised our forecast for the S&P 500, but lowered our forecast for real GDP growth. How can that be?

The first thing to recognize is that when we say we’re bullish on stocks that doesn’t mean we think the stock market is going to go up every day, every week, or even every month. It won’t. Nor does it exclude the possibility of a correction in equities, which based on historical frequency is past due.

We take a fundamental approach, valuing time in the market over trying to time the market. Corrections will happen from time to time, and we don’t know anyone who can accurately forecast them on a consistent basis.

Without digging deeply into our capitalized profits model which estimates a fair value for stocks as a whole, we remain bullish for three main reasons. First, long-term interest rates are low and are likely to remain relatively low for at least the next year. Second, corporate profits are very high and will remain relatively high even if they pull back from record highs as the amount of government “stimulus” wanes.

Third, even if real (inflation-adjusted) GDP growth falls short of consensus expectations in the next few years, nominal GDP (which includes both real GDP growth and inflation), should remain robust due to the Federal Reserve’s overly loose monetary policy – see point one above – which will remain extremely loose even as the Fed starts tapering later this year and ends quantitative easing around mid-2022.

The key problem for real GDP is that the massive and unsustainable fiscal stimulus and income support that happened during COVID pushed retail sales well above the pre-COVID trend. Retail sales in July were 17.5% above the level in February 2020. To put that in perspective, in the seventeen months before COVID, retail sales were up 5.1%. There is only one way retail sales can grow 3x its normal rate while millions are unemployed and the economy was locked down – the government pulled out the credit card.

Those handouts are now slowing down and retail sales likely dropped in August (official data to be reported Thursday morning) and are likely to moderate from the 17.5% peak growth rate, on a trend basis, for at least the next year.

Retail sales make up about 30% of GDP. So other sectors of the economy will need to pick up the slack – replenishing inventories, home building, and the consumption of services, such as travel and leisure activities. But, after such massive artificial stimulus, it will be difficult for real GDP to keep growing as it has in the past nine months.

GDP includes revenues that are earned by publicly traded companies, but it also includes Main Street businesses that are not listed. It is those latter businesses that have been hurt the most by lockdowns. That’s one reason listed-company profits and their stock prices have outperformed the economy.

The bottom line is that we are bullish for now, but fully recognize that we have been in a pristine environment for stocks. A slowdown in GDP will likely slow profit growth, while rising inflation will eventually lift long term interest rates. Tax hikes are still a threat, as are tougher COVID-related restrictions that limit a service-sector recovery. However, with the Fed as easy as it is, the tailwinds from easy money remain strong. The market is not overvalued, but it is not as undervalued as it once was.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

9-14 / 7:30 am CPI – Aug +0.4% +0.4% +0.5%

7:30 am “Core” CPI – Aug +0.3% +0.3% +0.3%

9-15 / 7:30 am Import Prices – Aug +0.2% -0.2% +0.3%

7:30 am Export Prices – Aug +0.4% +0.2% +1.3%

7:30 am Empire State Mfg Survey – Sep 18.0 24.5 18.3

8:15 am Industrial Production – Aug +0.5% +0.4% +0.9%

8:15 am Capacity Utilization – Aug 76.4% 76.3% 76.1%

9-16 / 7:30 am Initial Claims – Sep 14 320K 317K 310K

7:30 am Retail Sales – Aug -0.8% -0.8% -1.1%

7:30 am Retail Sales Ex-Auto – Aug 0.0% +0.1% -0.4%

7:30 am Philly Fed Survey – Sep 19.0 26.0 19.4

9:00 am Business Inventories – Jul +0.5% +0.5% +0.8%

9-17 / 9:00 am U. Mich Consumer Sentiment- Sep 72.0 71.0 70.3

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Can the US "Fully Recover"?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 7, 2021

In early 2020, when COVID hit, the unemployment rate in the United States was 3.5%, wages for low-income earners were rising faster than wages for high-income earners, living standards were rising…the economy was on a roll.

Then, because scientists said lockdowns would stop COVID, they turned the light switch off. Real GDP fell at a 5.1% annual rate in the first quarter of 2020 and then an annualized 31.2% in the second quarter.

Since then, because of re-opening, Federal Reserve money printing, and massive Treasury debt issuance to fund pandemic loans and benefits, the economy has rebounded. Real GDP hit at an all-time high in Q2 this year, 0.8% higher than it was at the pre-COVID peak at the end of 2019.

But this is not very comforting. Not only would the economy have grown roughly 3% in the absence of COVID, the economy has been boosted by over $800 billion in direct payments to individuals. That $800 billion is roughly 4% of annual GDP. Without this borrowing from the future, the economy would be smaller today, not larger.

We estimate that the lockdowns have cost the US economy 6% (4% from stimulus growth + 3% growth absent COVID – 0.8% all time high from pre-COVID peak) in lost output. Of course, it doesn’t appear this way because borrowing from the future allowed more spending today. It’s like giving morphine to an automobile crash victim. No pain, but underlying injuries.

So, how long will it take to fully recover? Factors that will boost growth include the general waning trend in COVID (yes, in spite of Delta, the death rate is running well below levels last winter), the natural process of economic recovery, faster productivity growth, entrepreneurs – who have packed many years of innovation into the past eighteen months – and the loose stance of monetary policy.

It’s important to pause for a moment and recognize that monetary policy, with short-term interest rates set near zero, has effectively become looser as inflation has moved upward. In the past year, the consumer price index is up 5.3%, which means that a short-term interest rate target of 0.1% generates a “real” (inflation-adjusted) interest rate of -5.2%. By contrast, the lowest real short-term interest rate in 2020 was -1.4% in March 2020. To put this in perspective, the lowest real rate in the aftermath of the Financial Crisis was -3.8%.

However, at least a few factors will also weigh on economic growth in the year ahead. First, the removal of fiscal stimulus compared to what was done in 2020 and early 2021. Take away the pain medication and the economic pain will become even more evident.

This underlying damage is reflected in the many small businesses that have been destroyed by COVID lockdowns that will not be there to help the economy rebound like they would have after prior recessions. This problem is made worse by excess unemployment benefits. Not only do these benefits slow the recovery, but they translate into an erosion of worker skills and know-how.

We think we’re seeing these negatives at work in some recent tepid economic reports. Nonfarm payrolls grew only 235,000 in August, far below consensus expectations. Yes, there is evidence that the Delta variant (and related policy responses) were responsible for a significant portion of the slowdown in job creation. Restaurants & bars reduced payrolls by 42,000 in August versus a gain of 290,000 in July. But Delta wasn’t the only factor. Just look at auto sales. Cars and light trucks were sold at a 13.1 million annual rate in August, the slowest pace in fifteen months and far below consensus expectations.

As recently as August 17, the Atlanta Fed’s GDP Now model was tracking 6.2% annualized real GDP growth in the third quarter. Now, three weeks later, it’s tracking 3.7%.

The next several weeks are important. It looks very likely that the bipartisan infrastructure bill, boosting spending by about $550 billion over the next decade, will pass. What’s unclear is whether President Biden and his legislative allies can pass a partisan bill of up to $3.5 trillion in extra spending, along with tax hikes. The odds still favor the Democrats getting something through on partisan lines, but the odds of a total failure to pass the partisan bill are growing, and recent comments by Senator Joe Manchin (D-WV) suggest that if something passes it will be substantially less than what the far left wants.

In the end, a “full recovery” of the economy is possible, but damage from past or future shutdowns – and a large partisan bill that once again, like New Deal or Great Society legislation, significantly increases the influence of the government over the economy – threaten its pace.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

9-8 / 2:00 pm Consumer Credit– Jul $25.0 Bil $25.0 Bil $37.7 Bil

9-9 / 7:30 am Initial Claims – Sep 7 335K 335K 340K

9-10 / 7:30 am PPI – Aug +0.6% +0.6% +1.0%

7:30 am “Core” PPI – Aug +0.6% +0.4% +1.0%

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

5,000

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

August 30, 2021

We’ve been consistently bullish on stocks since 2009. This bullishness has paid off, although not every year; stocks fell in 2015 and 2018. But, since 2009, the market has rebounded from every correction. Why have we stayed bullish? Because our Capitalized Profits Model has consistently shown the S&P 500 as “undervalued” since 2009. It still shows this today.

In the past twelve years we’ve set a forecast for the end of each year. When the market corrected, we often just reiterated that call for the next year. But, in a few of these years, we ended up raising our forecast during the year. For 2021, we set our year-end target at 4,200 for the S&P 500. By mid-April, however, the stock market was already flirting with 4,200. As a result, we raised our forecast to 4,500.

Now, once again, the stock market has outpaced our bullishness, surpassing 4,500. But that’s not the only important information we got last week. We also got economy-wide corporate profits for Q2 and they were outstanding, up 9.2% from Q1 and up 15.8% from the pre-COVID peak in late 2019.

These figures let us update the capitalized profits model. As many of you know, we think the current 10-year yield of 1.3% is being held artificially low by the Federal Reserve. As a result, we discount current profits using a more cautious rate of 2.0%. Plugging that rate into the model with superb Q2 profits generates a fair value estimate for the S&P 500 of 6,133.

How robust is this fair value estimate? Well, if corporate profits fell 36% (and the 10-year was 2.0%) the market would be at “fair” value today – roughly 4,500. The same result would occur if the 10-year yield more than doubled to 2.7%. In other words, the market is rising for a reason…profits are up and the threat from higher interest rates remains low. As a result, we think it is prudent to raise our 2021 year-end forecast to 5,000 on the S&P 500.

There are obviously risks to this forecast. 1) The US could “lockdown” the economy again over the Delta variant of Covid. 2) The Fed could raise rates more quickly. 3) President Biden, and the Democrats, could push through major tax hikes.

Rightly or wrongly, we don’t think the US will lockdown again. At the same time, last week’s “Jackson Hole” speech by Federal Reserve Chairman Jerome Powell made it clear that monetary policy is likely to remain very loose for the foreseeable future. The Fed may start to taper, but it will do so slowly, primarily because it thinks inflationary pressures are temporary. Also, the Fed views Delta as a risk to economic growth.

Yes, we are fully aware tax rates are likely to go up if Congress can pass an all-Democratic budget bill. But we think the kinds of tax hikes that would be likely to pass are already priced in, including a top regular income tax rate of 39.6% (versus 37%), a corporate tax rate near 25% (versus 21%), a top capital gains and dividends tax of 24% (versus the current 20% and President’s Biden’s proposed 39.6%). We don’t think they have the votes to end the step-up basis at death.

The bull market in stocks will eventually come to an end, and some sort of correction is overdue, but we think the general trend remains up and optimistic investors will be rewarded.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

8-31 / 8:45 am Chicago PMI - Aug 68.0 70.9 73.4

9-1 / 9:00 am ISM Index – Aug 58.5 59.0 59.5

9:00 am Construction Spending – Jul +0.2% +0.6% +0.1%

afternoon Total Car/Truck Sales – Aug 14.5 Mil 14.1 Mil 14.8 Mil

afternoon Domestic Car/Truck Sales – Aug 10.6 Mil 10.6 Mil 11.0 Mil

9-2 / 7:30 am Initial Claims – Aug 28 345K 352K 353K

7:30 am Q2 Non-Farm Productivity +2.4% +2.3% +2.3%

7:30 am Q2 Unit Labor Costs +1.0% +1.6% +1.0%

9:00 am Factory Orders – Jul +0.3% +0.1% +1.5%

9-3 / 7:30 am Non-Farm Payrolls – Aug 750K 750K 943K

7:30 am Private Payrolls – Aug 700K 700K 703K

7:30 am Manufacturing Payrolls – Aug 28K 27K 119K

7:30 am Unemployment Rate – Aug 5.2% 5.2% 5.4%

7:30 am Average Hourly Earnings – Aug +0.3% +0.3% +0.4%

7:30 am Average Weekly Hours – Aug 34.8 34.8 34.8

9:00 am ISM Non Mfg Index – Aug 62.0 62.7 64.1

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The Outlook for Vaccines, Variants and Elusive Herd Immunity

Lifestyle and Technology

August 26, 2021

How do COVID-19 vaccines perform against the delta variant? When is FDA approval expected? And is herd immunity really achievable?

Raymond James Biotechnology Analyst Steve Seedhouse, Ph.D., addresses these questions and more in the latest episode of For What It’s Worth. Hear him discuss the latest data around vaccine effectiveness, the transition from pandemic to possible endemic and how COVID-prompted innovation may open the door for the prevention of other illnesses.

For more important information click on the link below!

https://www.raymondjames.com/commentary-and-insights/lifestyle-technology/2021/08/06/the-outlook-for-vaccines-variants-and-elusive-herd-immunity

Leaving Money to Your Kids? Consider These Inheritance Tips

Estate and Giving

How to have a valuable family conversation about your estate.

Talking to family members about estate planning and legacies can be uncomfortable. These discussions, however, are an important way to share your choices with your children and prepare them for their financial futures.

Here are a few suggestions to help you broach this tricky topic and set your heirs up for better success.

Communicate your values about money in a larger context.

Build on the casual conversations you've already had with your kids about what matters to you most. When children are familiar with their parents’ values, they're more likely to have a good idea of what to expect from their parents’ estates.

A few ideas to get the discussion started: how do you feel about the value of education, hard work or integrity of character? What philanthropic causes are most important to you and why? What are some of the life experiences that have helped shape who you are?

Evaluate your children’s money skills.

Kids who grew up in the same family don’t always have the same knowledge and attitudes about money – while some may have a real interest (or education) in financial decision-making, others may not be at the same level of readiness and responsibility. Conversations about estate planning can become part of larger discussions designed to help teach them how to manage and become comfortable with their legacies.

Remember, you have flexibility around how and when you pass on your wealth. If your heirs are ready now, you might wish to share part of their inheritance while you’re still alive, allowing you to provide guidance and enjoy their development as stewards of your wealth. If you’re less confident in their financial responsibility, you might consider using a well-structured trust to better ensure your intentions for the wealth are abided by.

Dispel misguided expectations about what they’ll inherit.

Perhaps you’ve quietly decided to leave all your assets to a charitable organization. Or, on the other end of the spectrum, you’d like your children to take ownership of substantial wealth you’ve kept under the radar – perhaps in the form of land or business ownership.

Whether your kids will be inheriting nothing, significant wealth, or something in between, providing a clearer understanding of what they'll be taking on will prevent misguided expectations. Though the conversation may be uncomfortable, discussing it now can help avoid further discord down the line.

If you are planning to leave your kids a large inheritance, consider including them in a conversation with your financial advisor, who can help heirs learn more about the financial and the emotional aspects of managing inherited wealth. They can also help you consider different options, such as giving more to your children during their lifetimes, to possibly reduce the impact of a sudden inheritance.

If your kids’ inheritances will look very different, communicate it early.

Ultimately, how you choose to share your wealth – and with whom – is entirely up to you. But if your estate plan doesn’t treat your children equitably, it’s wise to share that information well in advance and communicate it privately to each child. If you can discuss these provisions and the reasons for them ahead of time, there’s less likelihood of conflict between siblings after you're gone.

In addition to having an in-person conversation with your heirs, it may also be wise to include your rationale in your will. This can help safeguard against possible claims of attorney drafting errors or other grounds for contesting the document.

Set apprehension aside.

Perhaps the strongest reason for not discussing estate plans with family members is fear – fear that children will be angry or disappointed, that their expectations for their inheritance are inflated, or that they’ll be resentful of other heirs. Although these conversations can be difficult, remind yourself that they're an important step in providing clarity about your financial legacy – which is ultimately in everyone's best interest.

Raymond James and its advisors do not offer legal advice. You should discuss any legal matters with the appropriate professional.

The Data Doesn't Lie - Raise Your Phone Scam Awareness

Hartford Funds Investor Insight

By: Laurie Ortlov

August 23, 2021

Unfortunately, many people don’t discover scams until it’s too late. The following article will touch on why phone scams are so effective, educate on the top three phone scams happening, and pass along some helpful tips on how to protect yourself.

https://www.hartfordfunds.com/insights/investor-insight/mit/8000-days-of-retirement/the-data-does-not-lie-raise-your-phone-scam-awareness.html?mkt_tok=ODYxLVJXUy02OTkAAAF_EjtFsaLt_wgSeSriuhd8WYcaXa3-N7VTX_XMGItGUQacwtfN9Hp9cICyDeXIxEX2mIFJyEuc-6t0A0Fwj1mkZSiepSwsfNdtJo2MY-i8DrZmsg&programID=7544&utm_campaign=2021-08-23-SUB-Phone_Scams&utm_content=practice_management&utm_medium=email&utm_source=hartfordfunds.com

This article was written by a 3rd party. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.

1 Protecting Older Consumers, Federal Trade Commission, 10/18/20, 2 5 Ways to Stop Senior Citizen Scams, Consumer Reports, 6/15/19, 3 Scam Glossary, Federal Communications Commission, 2/11/21, 4 Older people are more likely to live alone in the U.S. than elsewhere in the world, Pew Research Center, 3/10/20, 5 People who live alone among the likely to be scammed, Cadillac News, 10/17/19, 6 Financial Exploitation Is Associated With Structural and Functional Brain Differences in Healthy, 7 Older Adults, The Journals of Gerontology, 5/2/17. Most recent data available. Elder Fraud, FBI, 2021

Fed Being Tempted Into SIN

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

August 23, 2021

Narratives get more energy these days because of social media and cable TV, but they’ve always existed. Back in the 1970s, one narrative was that inflation was not caused by too much money creation by the Fed, as Milton Friedman argued. Instead, it was caused by OPEC or “inflation expectations.” And politicians came up with a plan…it proved disastrous.

In October 1974, with inflation running at about 12% (no, not a typo), President Ford announced a plan to “Whip Inflation Now,” which was supposed to reduce inflation, not by tightening monetary policy, but by changing consumers’ habits. Consumers were encouraged to wear “WIN” buttons.

The good news was that this approach was a more free-market method than the government-enforced wage & price controls imposed under President Nixon. The bad news was that by ignoring monetary policy as the ultimate source of inflation it was destined to fail.

The theory behind the WIN campaign was that inflation was caused by consumers spending too much money, so reducing inflation required consumers to save more and spend less, by, for example, growing their own vegetables, car-pooling, and using less energy in their homes. The idea was that changing consumer spending habits would wrestle inflation under control.

It’s easy to look back now and laugh at this absurd attempt to reduce inflation. Alan Greenspan, who worked for Ford in the White House, wrote in his book “The Age of Turbulence” that, at that time, he was thinking, "this is unbelievably stupid."

These days it appears the Fed has come full circle and is trying to create more inflation. We decided to give the campaign a name : Start Inflation Now. And maybe the Fed should print some SIN buttons.

That, in a nutshell is the policy proposal published by David Wilcox, a former influential research director at the Federal Reserve, and David Reifschneider, a former Fed economist and adviser to Treasury Secretary Janet Yellen (who backs the reappointment of Jerome Powell).

In particular, Wilcox and Reifschneider want the Fed to raise its 2.0% inflation target to 3.0%, which would let the central bank run a looser monetary policy. They believe this looser monetary policy would help create more jobs, reduce unemployment, and even reduce racial inequities.

We think consistently higher inflation is a bad idea. Printing more money is not a path to sustainable prosperity. Higher inflation would make business planning more difficult and reduce the “real” (inflation-adjusted) wages of workers, particularly those with the least bargaining power, including lower-income workers.

Nevertheless, we think a higher inflation target is being discussed internally at the Fed. What this means is that even though the Fed is talking about “tapering,” it is highly likely to maintain a far easier monetary policy than what otherwise is warranted. Even if the Fed moves toward tapering its bond buying, short-term interest rates will still be near zero. The Fed is still going to be loose even when QE is done.

For now, the Fed still says it expects inflation at about 2.0% next year as well as in the years beyond. We think inflation will be higher than that next year and, if the Fed doesn’t explicitly reject the idea of a new higher 3.0% target, may be higher for many years to come.

Money is a contract between government and the people. A stable currency is essential for a stable economy. With the M2 measure of money now 33% higher than it was in February 2020, total spending – prices plus real output -- will end up 33% higher. That doesn’t mean a 33% increase in the CPI; after all productivity is growing. But this is more extra money than the US economy has absorbed since the 1970s. We may have more than one book written by advisors in DC today that echo what Alan Greenspan thought back in the 1970s.

Narratives work for political entities in the short-run, but often lead to disastrous outcomes over time. We will be watching the new SIN policy closely in the years ahead.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

8-23 / 9:00 am Existing Home Sales – Jul 5.830 Mil 5.860 Mil 5.990 Mil 5.860 Mil

8-24 / 9:00 am New Home Sales – Jul 0.699 Mil 0.701 Mil 0.676 Mil

8-25 / 7:30 am Durable Goods – Jul -0.2% -2.0% 0.9%

7:30 am Durable Goods (Ex-Trans) – Jul +0.5% +0.5% +0.5%

8-26 / 7:30 am Initial Claims – Aug 22 350K 355K 348K

7:30 am Q2 GDP Preliminary Report 6.7% 6.9% 6.5%

7:30 am Q2 GDP Chain Price Index 6.0% 6.0% 6.0%

8-27 / 7:30 am Personal Income – Jul +0.2% +0.2% +0.1%

7:30 am Personal Spending – Jul +0.4% +0.2% +1.0%

9:00 am U. Mich Consumer Sentiment- Aug 70.9 71.0 70.2

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Capitalism vs. Socialism

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

August 16, 2021

As we wrote last week, it’s not possible to analyze the economy these days without focusing heavily on what government is doing. Between the Federal Reserve, fiscal policy, and COVID-related restrictions, little in our lives avoids governmental influences.

The easiest way we can describe the current environment is that in the short-term, forecasting is easy. As the virus wanes and the U.S. rides a wave of easy money and debt, the economy, earnings, and equity values will rise. Inflation will too, and so we favor hard assets and equities over longer duration fixed income.

As we look out further, forecasting becomes much tougher. Certainly government has grown, in sheer size, and also in power. When the CDC, a health agency, can impose a moratorium on evictions (in violation of property-owners rights), the U.S. has moved a long way from its historic roots. If, after passing $5 trillion in emergency pandemic spending, the government can be talking about $4.5 trillion more, we have entered new territory.

The history of the world has been a battle between two competing ideologies of how resources should be distributed: Capitalism and Socialism.

Capitalism distributes resources to the most productive use through markets and competition, while at the same time putting brakes on greed and selfishness. In order to accumulate resources in a capitalist system, you must provide goods or services for which someone else is willing to pay. If your cost of production is greater than what the market is willing to pay, you will not create much wealth. Or, if a competitor can provide the equivalent or better for a lower price, you will lose market share and therefore your wealth.

As a result, while it may be true that some people in a capitalist system become extremely wealthy, they do it by creating goods or services that people want and in a way that competitors have a difficult time copying.

Under Socialism, on the other hand, politicians distribute resources. They tax individuals who have been able to create income and wealth and then transfer those resources to their favored causes or group, often while shutting down competition. Governments do not create wealth, they spend it.

Just to be clear, Capitalism does not mean zero government, and it does not mean anarchy. There are things that government can do that benefit all citizens without redistributing wealth or income. Public safety (police and fire), electrical grids, courts, sanitation, and national defense, for example. This government spending can generate huge benefits. Unlike in the U.S., no one has built a $1 billion paper mill in Afghanistan. Why? It wouldn’t last very long under the rule of the Taliban.

It would be good if government could do these things as efficiently as the private sector, and we could make a case that many of these things should be competitively bid out, but government creates monopolies in order to defend power, sometimes for better, sometimes for worse.

In the end, because the government doesn’t create wealth, it only redistributes it, the bigger it gets relative to the private sector, the harder it is to create more wealth in an economy. During the 20-years ending in the year 2000, non-defense, noninterest government spending averaged 13.2% of GDP, while U.S. real GDP grew an average of 3.4% per year. In the past twenty years (2000-2020) non-defense, non-interest government spending averaged 15.9% of the economy, while U.S. real GDP grew just 1.8% per year.

The bigger the government gets, the slower the economy grows. So far, the U.S. private sector has been able to grow, increase profits, and continue to lift wealth, although at a slower pace. We believe that’s because of the power of entrepreneurs and the new technologies they create. Eventually, this may not be the case.

During the Obama years, we described the economy as a Plow Horse. It got a little pep in its step from 2016-2020, but the spending, and tax hikes, that are being proposed right now could give it shin splints. Smothering capitalism has a cost. The open question right now is how much government and how much political allocation of resources Washington agrees on

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

8-16 / 7:30 am Empire State Mfg Survey – Aug 28.5 33.0 43.0

8-17 / 7:30 am Retail Sales – Jul -0.2% -0.5% +0.6%

7:30 am Retail Sales Ex-Auto – Jul +0.2% +0.7% +1.3%

8:15 am Industrial Production – Jul +0.5% +0.4% +0.4%

8:15 am Capacity Utilization – Jul 75.7% 75.6% 75.4%

9:00 am Business Inventories – Jun +0.8% +0.8% +0.5%

8-18 / 7:30 am Housing Starts – Jul 1.600 Mil 1.584 Mil 1.643 Mil

8-19 / 7:30 am Initial Claims – Aug 15 365K 395K 375K

7:30 am Philly Fed Survey – Aug 23.5 31.1 21.9

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

July Market Review

Dear Friends and Clients,

As the major domestic equity indices continued to mark new highs through July, they provided an example of how dueling narratives can both be true while the forward-looking market produces a clearly positive result. In this case, optimism bolstered by a broad selection of economic data and sentiment – gross domestic product (GDP) growth, employment, earnings and reduced inflationary fears among them – has managed to, for now, contain COVID-19 delta variant worries.

The S&P 500 and NASDAQ both set seven all-time highs in July, while the Dow Jones Industrial Average recorded five. Under those glossy headline numbers, however, lies a more complex situation with wide disparities in performance between firm sizes, sectors, growth versus value, and commodities. For example:

• The S&P 500, reflecting large-cap firms, went up 2.38% in July. The Russell 2000 with its small-cap firms ended the month down 3.61%.

• The healthcare and real estate sectors were July’s best performers, while energy and financials were its worst.

• ·The S&P Growth Index rose 3.79%. The S&P Value Index rose only 0.79%.

• Gold rallied, gaining 2.6% while oil was up slightly with a 0.7% gain.

“Part of this performance dichotomy may be related to concerns over the spread of the COVID-19 delta variant and its potential for slowing the economy,” said Raymond James Chief Investment Officer Larry Adam. “However, our belief is that economic growth will remain strong as widespread lockdowns are unlikely to reoccur.”

At the end of the month, the U.S. Department of Commerce reported GDP growth at a 6.5% annual rate in the second quarter, which follows 6.3% growth in the first. However, even this considerable rate understates the strength of the economy in the first half of the year as consumer spending and business investments have surged.

“The pace of growth is expected to slow in the second half of the year but should remain strong,” said Chief Economist Scott Brown.

Let’s look at the numbers:

Here are some other notable events and trends through July.

Earnings beat historical average fifth time running

Corporate earnings have continued to beat estimates at rates that have become common over the last 15 months. About 85% of companies had higher quarterly earnings than expected, above the 69% historical average and in line with the 83% average of the prior four quarters. Also, results are beating estimates by a very elevated 19% once again, compared to a 5% historical average.

Value proposition remains with investment-grade corporate debt

The theme of July for fixed-income investments is a lower, flatter yield curve, as the basis point difference between short- and long-term Treasurys contracted. Investment-grade corporate debt, however, saw a marginal widening of the spread (the yield differential between Treasurys and investment-grade corporate bonds). High-yield corporate bonds saw a greater widening.

But yields in general remain tight as demand for fixed-income funds remains strong and uncertainty surrounds the COVID-19 delta variant. Looking long term, concerns about the consumer habits of the aging (and wealth-holding) U.S. population and how that could affect a wide swath of sectors may also play into the trend. Compared to other fixed-income alternatives, investment-grade corporate debt in the three- to seven-year duration range continues to provide a good balance between yield and risk. 

The thousand-day infrastructure week

A bipartisan deal on infrastructure reached the Senate with $550 billion in new funds for physical infrastructure, broadband and electric vehicles while avoiding new tax impacts, which could spur a wave of municipal spending and new debt for partial cost matching. Next up, expect to see attention turn to additional social and infrastructure spending and several potential “fiscal cliffs” – namely, the national debt ceiling limit and the expiration of pandemic-related programs.

Europe takes a pause and Asian markets falter

Though second-quarter pan-European corporate data has unsurprisingly shown significant year-on-year progress, stock markets across Europe generated little change during July. The U.K. relaxed its pandemic restrictions mid-month, priming August to beat expectations as spending and holiday travel rushes back.

In contrast, emerging markets struggled, especially in Asia-Pacific. Chinese and Hong Kong markets tallied significant losses throughout the month amid concerns about heightened levels of Chinese government intervention in certain sectors. Comments by many Chinese companies – which are mostly scheduled for August – will help provide further details. Nationwide economic restrictions resulting from the delta variant in Indonesia and Malaysia, and in some Australian cities, also caused headwinds.

The bottom line

How the COVID-19 delta variant may affect the economy has yet to be revealed even as hospitalizations increase to record levels in some places. Meanwhile, we continue to see positive economic data and tallied another high-performance quarter through July. In total, even with contrasting performances beneath the surface, July was another strong month.

If you have any questions about your investments, your financial plan, this letter – or anything else – please reach out at your earliest convenience. I remain grateful for our relationship and your continued trust in me.

Sincerely,

Matt Goodrich, Financial Advisor                

President, Goodrich & Associates, LLC

Branch Manager, RJFS

All investments are subject to risk, including loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The S&P 500 Value is a market-capitalization-weighted index developed by Standard and Poor’s consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics. The S&P 500 Growth Index is a stock index that represents the fastest-growing companies in the S&P 500. It is currently heavily weighted toward prominent American technology companies. The MSCI EAFE (Europe, Australia, Far East) Index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes.

The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Small-cap securities generally involve greater risks. International investing is subject to additional risks such as currency fluctuations, different financial accounting standards by country, and possible political and economic risks. These risks may be greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The value of fixed income securities fluctuates and investors may receive more or less than their original investments if sold prior to maturity. High-yield bonds are not suitable for all investors. Material prepared by Raymond James for use by advisors.

The Seeds of Stagflation

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

August 2, 2021

Last week, the government reported real GDP in the US grew at a 6.5% annual rate in the second quarter and was up 6.4% at an annual rate in the first half of 2021. Real GDP is now 0.8% larger than it was at its peak just prior to COVID.

The problem is that getting back to where we were just prior to COVID is a low hurdle to clear. Real GDP would have grown much faster if COVID hadn’t happened. In other words, the economy is smaller today than it would have been in the absence of COVID, which is to say the economy is healing but still has a long way to go before it’s fully healed.

What’s more interesting is that when we measure the economy in terms of the volume of dollars being spent – nominal GDP, which reflects both real GDP and inflation – we are already very close to where we’d be if COVID hadn’t happened. Nominal GDP is not only at a record high but up at a 3.1% annualized pace since late 2019.

So, how is it possible that the total amount of spending is close to “normal” but “real” GDP is still below par? It doesn’t take a Ph.D. in economics to figure out that inflation is the difference. Since late 2019, GDP prices are up at a 2.7% annual rate. And, yes, that includes the steep drop in prices early in 2020, during the onset of COVID. GDP prices grew at a 6.0% annual rate in the second quarter, the fastest pace for any quarter since 1981.

The rise in inflation is what you get when the government implements an unprecedented level of stimulus to support incomes while implementing policies like shutdowns and overly generous unemployment insurance that stifle production. It’s what you get when demand outstrips supply and this is exacerbated when the central bank prints excess amounts of new money. Inflation has arrived and it’s not just transient.

In the near future we expect continued solid economic growth. Inventories plummeted in Q2 as businesses had to dip deeply into their shelves and storerooms to satisfy consumer demand. Customers with newly printed money are showing up to buy goods and services, but businesses are struggling to find workers to produce more. In turn, depleted inventories mean plenty of room for more production in the year or so ahead. As extra unemployment benefits wane, employment will rise and spending will come from production, not artificial stimulus.

The government poured massive fiscal stimulus into the economy during the past year, or so. Yes, Congress is likely to pass an extra spending bill or two later this year, but this additional government spending will be spread out over years, unlike the massive checks sent out earlier in 2021. What this means is that the impact from stimulus will wane.

Meanwhile, damage from shutdowns will linger. It’s true that many supply-chain issues will be resolved, and some price pressures will ease, but the thought that real GDP will grow faster than nominal GDP is fanciful. With the money supply having risen so rapidly, and the ability of the economy to keep up with that growth diminished by a more burdensome government, stagflationary pressures (slower growth, higher prices) have been building. We don’t expect those pressures to disappear. So, while there will be volatility of data in the quarters ahead, the GDP data is exhibiting the seeds of that stagflation.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

8-2 / 9:00 am ISM Index – Jul 60.9 61.0 59.5 60.6

9:00 am Construction Spending – Jun +0.5% +0.2% +0.1% -0.3%

8-3 / 9:00 am Factory Orders – Jun +1.0% +0.7% +1.7%

afternoon Total Car/Truck Sales – Jul 15.3 Mil 14.9 Mil 15.4 Mil

afternoon Domestic Car/Truck Sales – Jul 11.8 Mil 11.3 Mil 11.5 Mil

8-4 / 9:00 am ISM Non Mfg Index – Jul 60.5 60.6 60.1

8-5 / 7:30 am Initial Claims – Jul 31 382K 385K 400K

7:30 am Int’l Trade Balance – Jun -$74.0 Bil -$74.3 Bil -$71.2 Bil

8-6 / 7:30 am Non-Farm Payrolls – Jul 900K 900K 850K

7:30 am Private Payrolls – Jul 750K 800K 662K

7:30 am Manufacturing Payrolls – Jul 28K 32K 15K

7:30 am Unemployment Rate – Jul 5.7% 5.7% 5.9%

7:30 am Average Hourly Earnings – Jul +0.3% +0.3% +0.3%

7:30 am Average Weekly Hours – Jul 34.7 34.7 34.7

2:00 pm Consumer Credit– May $22.5 Bil $23.5 Bil $35.3 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Saving for K-12 Education with a 529 Plan

Family and Lifestyle

Learn about using 529 plans for more than just college savings.

529 plans were originally established to help families pay for qualified higher education expenses by offering tax-deferred investment growth and tax-free withdrawals. In late December 2017, new federal tax legislation changed how these accounts can be used. Though individual states may have variations in how they treat these adjustments, one of the most impactful changes is that families can now pay tuition for primary and secondary education using the funds in a 529 plan.

Paying for primary and secondary school

Families can now use 529 plans to save and pay for tuition at private, public and religious elementary and secondary schools. The expansion of the “qualified higher education expenses” language means that families can contribute up to $10,000 (per year, per beneficiary) in connection with enrollment or attendance at these primary and secondary schools.

With the average annual cost of private school tuition at $11,599, according to Private School Review, that $10,000 annual withdrawal could make a clear impact on your family’s education expenditures.

K-12 qualified expenses

It’s important to note that tuition is currently the only qualified K-12 use for 529 funds. While the cost of books, computers and other school-related supplies are qualified for post-secondary students, those expenses don’t receive the same tax-advantaged status for primary or secondary students. Similarly, homeschooling expenses and other at-home learning costs aren’t qualified for K-12 students.

Variations by state and plan

Residents of more than 30 states are eligible for an income tax deduction or credit for 529 plan contributions used to pay for college or K-12 tuition, subject to variation depending on where you live and how much you contribute. And not all states are on the same page – in some states, 529 plan distributions used for K-12 expenses may still be taxable at the state level. Please consult with your tax advisor to best determine how each state may be treating the expenses associated with K-12 education.

Source: savingforcollege.com

Earnings in 529 plans are not subject to federal tax and in most cases state tax, as long as you use withdrawals for eligible college expenses such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Inflation, Shutdowns, Spending

First Trust Monday Morning Outlook

Brian S. Wesbury

July 26, 2021

Someone once said, “technology has never moved this fast, and at the same time, will never move this slow again.” So true! A partial list of recent technological advances includes: messenger RNA (mRNA) gene therapies, 5G wireless, blockchain, the cloud, low orbit communication satellites (Starlink), vertical indoor farming, and much more.

At the same time, the government in the United States has never been larger or more intrusive. This makes economic forecasting and investing a balancing act between the “supply side” of new technology and the “demand side” of government intervention.

Case in point is the Federal Reserve, which meets this week. The Fed is far less concerned than it should be about falling behind the curve on inflation. As a result, we don’t expect any significant changes to monetary policy.

Obviously, the Fed is still a long way off from raising shortterm interest rates. But, as we explained as far back as mid-June when the 10-year Treasury Note yielded roughly 1.5%, financial markets are much better prepared for an announcement about tapering and the eventual end of quantitative easing than they were back in 2013 under Fed Chair Ben Bernanke, when we witnessed the “taper tantrum.” In other words, we think the Fed will continue to kick the can down the road, though it shouldn’t.

The consumer price index is up 5.4% versus a year ago and up at a 3.5% annualized rate since February 2020, preCOVID. The Fed’s preferred measure of inflation is the PCE deflator. We think this was up about 0.7% in June (to be reported Friday). If so, this inflation measure is up 4.1% from a year ago and up at a 2.9% annualized rate versus February 2020. Yes, some of this inflation represents temporary supply-chain issues. But it also reflects overly loose monetary policy. The M2 measure of the money supply has soared 32% since COVID hit, something that didn’t happen during or after the Financial Crisis in 2008-09. Those assuming inflation gets back to a roughly 2.0% trend in 2022 are in for a rude awakening.

But inflation shouldn’t be our only government worry. Even though hospitalizations and deaths remain way down versus previous spikes, the media has been amplifying any negative news it can find on the “Delta” variant and we can’t casually dismiss the possibility that some places around the country are going to re-tighten limits on economic activity and schools later this year.

Our best guess, though, is that the hurdle to re-imposing strict limits is going to be very high. Republican states have generally supported looser restrictions, while Democratic states more often supported tighter restrictions. With elections right around the corner, there are reasons to expect a less restrictive response on average.

Meanwhile, policymakers are fighting about two measures to increase federal spending over the next several years. The first measure is a bipartisan infrastructure deal to raise spending by about $1 trillion, although some of the spending may be repurposed from other programs. No guarantees, but our best guess is that this measure eventually dies.

The other measure would be a purely partisan Democrat effort to boost spending by up to $3.5 trillion over the next several years. The momentum behind this effort is waning because the US has already pushed through nearly $5 trillion in spending bills during the pandemic and it only takes one “no” vote from a Democratic senator to kill it. However, Democrats have a great deal of political capital invested in the idea of “human infrastructure” and tax hikes, and this legislation is far from dead.

The economy is healing rapidly, the bull market remains intact and technology is raising potential future growth. But, government actions could undermine these positive trends. For now, we remain bullish.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

7-26 / 9:00 am New Home Sales – Jun 0.796 Mil 0.802 Mil 0.676 Mil 0.769 Mil

7-27 / 7:30 am Durable Goods – Jun +2.0% +2.6% +2.3%

7:30 am Durable Goods – Jun +0.8% +0.4% +0.3%

7-29 / 7:30 am Initial Claims - Jul 20 382K 380K 419K

7:30 am Q2 GDP Advance Report 8.5% 8.3% 6.4%

7:30 am Q2 GDP Chain Price Index 5.4% 4.9% 4.3%

7-30 / 7:30 am Personal Income – Jun -0.4% -1.0% -2.0%

7:30 am Personal Spending – Jun +0.7% +0.5% 0.0%

8:45 am Chicago PMI 64.0 69.0 66.1

9:00 am U. Mich Consumer Sentiment- Jul 80.8 81.0 80.8

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Strong Growth in Q2

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

July 19, 2021

Another quarter for consumers to rely on massive stimulus payments, extremely loose monetary policy, and the continued re-opening of the US economy combined to push real GDP up at a very rapid pace in the second quarter, with the federal government preparing to release its initial estimate of economic growth on July 29.

At present, we are estimating that real GDP grew at an 8.3% annual rate in Q2, an acceleration from the 6.4% growth rate in Q1 and, with the exception of the massive surge in output in the third quarter of 2020, which offset the massive plunge in production in Q2 of 2020, the fastest growth rate for any quarter since the early 1980s.

Remember, though, that much of the recent rapid growth we’ve seen is really just a “sugar high.” Look for economic growth to slow in the second half of the year, and then even more so in 2022.

In the meantime, it’s important to recognize that although rapid growth is welcome, that the economic glass remains half empty. Yes, real GDP likely hit a new all-time high. Yes, if our estimate is correct, real GDP will be up 0.7% annualized versus the last quarter of 2019, which is when we hit the previous peak in quarterly real GDP.

However, in the absence of COVID-19, the economy almost certainly would have grown faster than that pace in the meantime, which means that, even at an all-time high, real GDP is still smaller than it would have been if COVID had never happened.

Note, also, that as the economy emerges from the COVID disaster, changes in international trade flows and inventories can have an outsized effect on GDP numbers. A day before the government releases the GDP report it will release some preliminary figures for trade and inventories in June, which may alter our forecast.

In the meantime, an 8.3% growth rate is our best estimate and here’s how we get there:

Consumption: Car and light truck sales rose at a 3.7% annual rate in Q2, while “real” (inflation-adjusted) retail sales outside the auto sector soared at a 12.7% annual rate. We only have reports on spending on services through May, but it looks like real services spending should be up at a rapid rate, as Americans got back toward normal (think recreation, restaurants, bars,…etc.). As a result, we estimate that real consumer spending on goods and services, combined, increased at a 9.8% annual rate, adding 6.7 points to the real GDP growth rate (9.8 times the consumption share of GDP, which is 68%, equals 6.7).

Business Investment: The second quarter should continue the pattern of recovery, led by investment in business equipment. Investment in intellectual property should also gain, as usual, and we may eke out a small gain in commercial construction, as well. Combined, business investment looks like it grew at a 7.6% annual rate, which would add 1.0 points to real GDP growth. (7.6 times the 13% business investment share of GDP equals 1.0).

Home Building: Residential construction continued to grow in Q2, although not as quickly as in recent prior quarters, a reflection of higher construction costs and less labor availability. Look for faster growth in this sector in the year ahead as excessive jobless benefits run out. We estimate growth at a 2.1% annual rate in Q2, which would add 0.1 point to the real GDP growth. (2.1 times the 5% residential construction share of GDP equals 0.1).

Government: It’s hard to translate government spending into GDP because only direct government purchases of goods and services (and not transfer payments like extra unemployment insurance benefits) count when calculating GDP. We estimate federal purchases grew at a 1.1% annual rate in Q2, which would add 0.2 points to real GDP growth. (1.1 times the 18% government purchase share of GDP equals 0.2).

Trade: Faster economic growth in Q2 brought a larger trade deficit (at least through May), a by-product of a faster recovery in the US than in Europe. At present, we’re projecting net exports will subtract 0.2 points from real GDP growth in Q2.

Inventories: Inventories look like they fell again in Q2 as businesses with supply-chain issues had to dip into inventories to meet strong consumer demand. However, inventories didn’t fall as rapidly as they did in Q1, and in the arcane world of GDP accounting, that means inventories will make a positive contribution to growth in Q2, which we are estimating at 0.5 points.

Add it all up, and we get 8.3% annualized real GDP growth for the second quarter, very high by historical standards, but representing an economy that is still smaller than it would have been in the absence of COVID.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

7-20 / 7:30 am Housing Starts – Jun 1.590 Mil 1.590 Mil 1.572 Mil

7-22 / 7:30 am Initial Claims - Jul 18 350K 364K 360K

9:00 am Existing Home Sales – Jun 5.900 Mil 5.800 Mil 5.800 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

4,500... Or Higher

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

July 12, 2021

Many are convinced that a US stock market correction, or even a bear market, is inevitable. So, when the S&P 500 was down 1.6% last Thursday, many thought it had arrived. Then, the S&P 500 rebounded and hit a new all-time high on Friday. Being bearish on equities has not worked for a long time.

This does not mean the market always goes up. It doesn’t mean that the government is not creating future problems. But, we don’t try to time the market. What we do is focus on fundamentals, like profits and interest rates. And right now, we believe the S&P 500 is still undervalued.

Late last year, when the S&P 500 was at 3,638, we used those fundamentals to project a year-end 2021 target of 4,200, for an increase of 15.4%. However, with profits returning toward normal even faster than we had anticipated, the S&P 500 hit 4,185 in mid-April and we upped our projection to 4,500, which would be a full-year gain of about 19%.

Now, with the S&P 500 just 3% from our target, we choose to stand pat. Why? We do not want to leave the impression that we are traders, shifting our target over and over. We are investors. It’s the long-term that matters. The US stock market has been undervalued relative to our Capitalized Profits Model since 2009.

Our model takes the government’s measure of economywide profits from the GDP reports, discounted by the 10-year US Treasury note yield, to calculate fair value. If we use a 10-year Treasury yield of 1.36% (Friday’s closing yield) to discount profits (from the first quarter, the most recent available), then our model suggests the S&P 500 is 45% undervalued. And with profits likely to grow 20% or more this year, fair value will rise more as the year unfolds.

Right now, the Fed is artificially holding interest rates down across the yield curve. So, when we calculate our estimate of fair value, we use a 2.0% 10-year yield. Using this 2.0% rate gives us a fair value of 5,240. It would take a 10- year yield of about 2.4% for our model to show that the stock market is currently trading at fair value (with no increase in profits.) If rates do rise, because the economy is stronger than the Fed expects, it would likely be accompanied by even faster profit growth.

We fully understand that current monetary policy is inflationary, and that past government spending, plus what some politicians are asking for right now has lifted US Federal debt above 100% of GDP.

These policies could shift economic growth, the level of interest rates and our estimate of the fair value of stocks in the years ahead. But for the foreseeable future, re-opening, easy money and deficit spending are all pushing economic growth and profits up. With the Fed holding rates down and profits booming, and with our model saying stocks are undervalued, we are still bullish. And right now we think if our 4,500 target is wrong, it is likely too low.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

7-13 / 7:30 am CPI – Jun +0.5% +0.5% +0.6%

7:30 am “Core” CPI – Jun +0.4% +0.3% +0.7%

7-14 / 7:30 am PPI – Jun +0.6% +0.6% +0.8%

7:30 am “Core” PPI – Jun +0.5% +0.4% +0.7%

7-15 / 7:30 am Initial Claims Jul 10 350K 370K 373K

7:30 am Import Prices – Jun +1.1% +0.6% +1.1%

7:30 am Export Prices – Jun +1.4% +0.9% +2.2%

7:30 am Empire State Mfg Survey – Jul 18.0 20.0 17.4

7:30 am Philly Fed Survey – Jul 28.0 30.0 30.7

8:15 am Industrial Production – Jun +0.6% +0.7% +0.8%

8:15 am Capacity Utilization – Jun 75.6% 75.7% 75.2%

7-16 / 7:30 am Retail Sales – Jun -0.4% -0.5% -1.3%

7:30 am Retail Sales Ex-Auto – Jun +0.4% +0.3% -0.7%

9:00 am Business Inventories – May +0.5% +0.6% -0.2%

9:00 am U. Mich Consumer Sentiment- Jul 86.5 87.0 85.5

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance

"Twin Deficits" Won't Tank the Dollar

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

July 6, 2021

Many analysts have been thinking and writing about the “twin deficits” and whether the record-breaking size of those two deficits, combined, mean the US dollar is about to plummet versus other currencies.

Before we get into the weeds, a little background is necessary. When people talk about the twin deficits they are talking about the budget deficit plus the trade deficit. Combined, these two deficits were 22.8% of GDP in the year ending in the first quarter, easily the highest on record. Before the pandemic, the record high was 12.8% of GDP back in 2009. Before the Financial Crisis, previous peaks included 8.7% in 2004-05 and 8.0% back in 1985-86.

The reason they are called the “twin” deficits is that superficial Keynesian theory suggest they should go together. The idea is that if the United States runs a larger budget deficit, it should have higher interest rates, which should drive up the value of the dollar. In turn, a higher dollar means more imports (we can buy more stuff!) and lower exports (foreigners buy less because it costs them more to get dollars).

This theory seemed to work in the 1980s. Budget deficits grew under President Reagan, mostly because of more defense spending, and so did the trade deficit.

However, the theory fell apart in the 1990s, when the budget deficit fell (and even turned into surpluses). If the theory held, you’d expect the trade deficit to shrink, too. But that didn’t happen. In fact, the current account deficit, which is the most comprehensive measure of the trade deficit, hit a new peak at 3.9% of GDP in 2000, even higher than the peak of 3.3% in the late 1980s.

What this showed was that the old Keynesian theory behind the twin deficits was too superficial and the two deficits don’t have to move in tandem. What really matters isn’t whether the government runs a larger or smaller budget deficit; what matters is the set of policies the government is implementing.

In the 1980s, the Reagan Administration cut tax rates, deregulated, and got inflation under control. All of these policies made the US a better place to invest. Those policies attracted capital from the rest of the world, which pushed up the dollar and also increased the trade deficit.

In the 1990s, a large combination of factors helped the economy and also reduced the budget deficit. These include lower inflation (which reduced the effective capital gains tax rate), the “peace dividend” (which allowed for less military spending), President Clinton holding to the federal spending caps inherited from President Bush, the failure of Clinton-care, enacting welfare reform and Medicare reform, free trade pacts, and the natural aging of Baby Boomers into their peak earning years.

All of these helped reduce the budget deficit, but they also made the US a better place to invest. And being a better place to invest meant a higher dollar and an increase in the trade deficit. So, in the 1990s, the twin deficits were not twins at all: the budget deficit went down and the trade deficit went up.

Right now, the combined twin deficit is at a record high. But notice that almost all the increase is due to the budget deficit. The trade deficit is larger than it was a year ago, but is roughly the average it’s been for the past twenty years.

Now, ask yourself, since the onset of COVID, since when the budget deficit has soared, has the US adopted policies to improve its long-term growth potential? Have we cut tax rates? Have we deregulated? Have we reigned-in or reformed government spending programs or made them more actuarially sound? No, we have not, unfortunately. What we have done is spent future taxpayers’ money like there is no tomorrow to generate some extra economic growth in the short-term.

The pandemic-related policy set in the US is not as dollar friendly or investment-friendly as what we did in the 1980s or 1990s. However, because every other country has done similar things, the US is a relative safe-haven for economic activity versus others.

Considering all this, we do not expect a massive increase in the trade deficit to match the surge in the budget deficit. The lack of a massive trade deficit to match the budget deficit is important for forecasting the dollar because a massive trade deficit could put political pressure on the Federal Reserve to reduce the exchange value of the dollar by postponing rate hikes. Again, we don’t see that happening.

But at least it brings us back to what really matters for predicting future changes in the value of the dollar: monetary policy. Forecasting changes in the dollar is probably the toughest part of managing assets. And, right now, we are not forecasting the dollar to either plunge or soar in the next year.

The one thing we do know is that if the dollar does make a big move in either direction, it won’t be because of what we already know about the twin deficits.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

7-6 / 9:00 am ISM Non Mfg Index – Jun 63.5 63.7 60.1 64.0

7-8 / 7:30 am Initial Claims – July 3 350K 381K 364K

2:00 pm Consumer Credit– May $18.3 Bil $18.0 Bil $18.6 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

June Market Recap

July 1, 2021

June Market Review

Dear Friends and Clients,

Inflation was top of mind for investors throughout June as the Core Consumer Price Index (CPI) notched its highest increase since 1992. “While it appears the inflation genie has peeked out of the bottle with CPI at 3.8%, the Fed has been granted its wish, convincing the markets of a strong economy and temporary inflation that should trend back toward the 2% long-term goal by next year,” says Larry Adam, chief investment officer.

Despite what are expected to be transitory inflation pressures, the growth outlook for this year remains strong. Recent data suggests a quick recovery as the economy reopens, but the pace may not be quite as brisk over the second half of the year, says Chief Economist Scott Brown. Rapid growth has strained supply chains and there are enormous difficulties in matching millions of unemployed workers to available jobs, although Brown expects those issues to resolve over time.

Bipartisan negotiations continue in Washington, D.C., around tax changes, national spending and the infrastructure bill. With the path forward highly uncertain, domestic equity markets may experience increased volatility over the later part of the summer, says Washington Policy Analyst Ed Mills.

Here’s where we are so far this year:

On stocks and bonds

Short to short-intermediate interest rates are slightly up for the month, while longer duration Treasury yields are down. On a relative basis, all sectors continue to experience very tight spreads. The narrowed yield curve has stoked some concern about the health of the recovery. The economic recovery is on solid footing, believes Joey Madere, senior portfolio analyst of Equity Portfolio & Technical Strategy. Low rates and lower credit spreads seem supportive of equity markets at this point in time.

Attention turned to future actions by the Federal Open Market Committee, specifically whether the committee members might consider an increase to the fed funds rate sooner than expected. Keeping it in context, “sooner” is likely 1.5 years away, notes Doug Drabik, managing director for fixed income research.

The Fed continues to be accommodative and is still purchasing $120 billion in Treasury and mortgage-related products monthly.

Overseas

The G7 meeting saw commitments toward climate change, a reduction in the use of coal and the earmarking of 1 billion vaccines for developing countries. European fiscal policy hasn’t changed much despite improved economic growth prospects and inflation expectations. Some COVID-19-related travel restrictions remain in place, slightly hindering regional summer holidays, although U.K. and European markets continued their upward trend, adding to year-to-date gains, explained European Strategist Chris Bailey. In Asia, regional equity market performance remains lackluster, and China’s financial decision-makers appear concerned with limiting any inflationary threats.

Also of note is Iran’s presidential election and its potential impact on oil supply and pricing. Oil prices ended June near pandemic-era highs. Iran President-elect Ebrahim Raisi’s nationalist tendencies may complicate ongoing nuclear negotiations and limit the prospect of lifting U.S. sanctions imposed on the country’s oil exports. A snag in negotiations means the export of 1.5 to 2 million barrels per day could be at stake, representing just under 2% of global supply, according to Energy Analyst Pavel Molchanov.

The bottom line

The economic recovery remains robust, with the equity market continuing to reach new heights. Savvy stock investors should consider using temporary pullbacks in certain sectors as an opportunity to strategically add to their portfolios. There is also a continuation of money being added to the economy and we should expect a continuation of the expected consequences: Stocks continue to go up and yields continue to fall.

As always, I thank you for your continued confidence in me. I’ll be sure to keep my eyes on the markets and relate anything of relevance. If you have any questions, please reach out at your convenience.

Sincerely,

Matt Goodrich, Financial Advisor                

President, Goodrich & Associates, LLC       

Branch Manager, RJFS                                   

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Small-cap securities generally involve greater risks. International investing is subject to additional risks such as currency fluctuations, different financial accounting standards by country, and possible political and economic risks. These risks may be greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation, and may not be suitable for all investors.

Material prepared by Raymond James for use by its advisors.

Who Will Be the Next Fed Chief?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

June 28, 2021

One of the key decisions President Biden will make later this year is who is going to run the Federal Reserve for the next four years. Current Fed chief Jerome Powell’s term as chairman runs out in February 2022. We think the choice will ultimately come down to two people: Roger Ferguson or Jerome Powell.

The case for Roger Ferguson is easy. First, presidents like to appoint people from their own party and Ferguson is a Democrat. Second, Ferguson already has experience at the Fed, having been appointed as a Governor and then Vice-Chairman by President Clinton in the late 1990s and serving through 2006.

Third, Ferguson has both a law degree and Ph.D. in economics from Harvard. Fourth, he was the CEO at TIAACREF for almost thirteen years after leaving the Fed. And last, he would be the first Fed chief of African descent, which should make him politically attractive to the president. Notably, Ferguson retired from TIAA-CREF in March, which means he’s available at a moment’s notice.

However, we also think Biden will take a long hard look at re-appointing Powell. The last “dot plot” from the Fed, setting out projections for the future path of monetary policy, showed seven policymakers thinking short-term interest rates will rise in 2022 and a majority (13 of 18) thinking rates will go up by the end of 2023. In fact, the “median dot” shows two rate hikes (25 basis points each) by the end of 2023. And yet, based on our interpretation of his comments after the meeting and since, Powell is likely to be one of the policymakers projecting no rate hikes through 2023.

So, if you’re Biden, and you want the Fed to postpone rate hikes as along as possible, Powell makes an attractive choice. As chairman already, he has both credibility with the financial markets as well as inside knowledge of how other policymakers are thinking about monetary policy. Based on his experience, he might be better prepared to privately debate more hawkish policymakers and convince them to hold off on rate hikes.

Plus, even though Biden would like to reward someone from his own party, like Ferguson, Powell is a Republican and the political situation later this year might favor re-appointing Powell as a gesture of bipartisanship, like Clinton re-appointing Alan Greenspan twice.

Other possible appointees include current Fed governor Lael Brainard and Treasury Secretary (and former Fed chief) Janet Yellen. Both would be qualified, but Yellen’s previous chairmanship has already broken a “glass ceiling” for women, Yellen seems interested in staying at Treasury and Brainard might be too dovish to convince more hawkish policymakers that they should hold off on rate hikes in 2022-23.

Regardless of who Biden picks, if we are right about inflation outstripping the Fed’s expectations next year, the next chairman will face a potential mutiny starting late next year. Monetary policy is extremely loose right now and likely to stay that way. But there is no financial crisis; markets are working fine. Yes, some of the inflation is “transient” – used car prices are not going to keep soaring like they have recently – but just wait until rents start going up later this year when limits on evictions are removed.

Whomever Biden appoints to run the Fed is going to have his hands full.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

6-30 / 8:45 am Chicago PMI - Jun 70.0 74.4 75.2

7-1 / 7:30 am Initial Claims - Jun 26 389K 387K 411K

9:00 am ISM Index – Jun 61.0 61.1 61.2

9:00 am Construction Spending – May +0.4% +1.1% +0.2%

afternoon Total Car/Truck Sales – Jun 17.0 Mil 16.0 Mil 17.0 Mil

afternoon Domestic Car/Truck Sales – Jun 12.4 Mil 12.2 Mil 12.6 Mil

7-2 / 7:30 am Non-Farm Payrolls – Jun 700K 675K 559K

7:30 am Private Payrolls – Jun 600K 550K 492K

7:30 am Manufacturing Payrolls – Jun 25K 20K 23K

7:30 am Unemployment Rate – Jun 5.6% 5.7% 5.8%

7:30 am Average Hourly Earnings – Jun +0.4% +0.4% +0.5%

7:30 am Average Weekly Hours – Jun 34.9 34.9 34.9

7:30 am Int’l Trade Balance – May -$71.3 Bil -$71.8 Bil -$68.9 Bil

9:00 am Factory Orders – May +1.5% +1.3% -0.6%

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The "Fake Tight" Labor Market

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

June 21, 2021

Is the United States’ job market tight? Well, that totally depends on your perspective.

From a national perspective, it certainly isn’t tight. Total nonfarm payrolls were 144.9 million in May 2021, still down 7.6 million from February 2020, right before the COVID shutdowns. In addition, when asked, 9.3 million American workers say they are still looking for a job, up 3.6 million during the same timeframe.

The labor force participation rate, which is the share of those age 16+ who are either working or looking for work, was only 61.6% in May. Pre-COVID, you’d have to go back to 1977 to find a level that low. Immediately prior to COVID, the participation rate was 63.3%. In other words, the United States is awash in unemployed and available workers.

But none of this seems to matter if you’re an employer. Average hourly earnings are up a rapid 6.4% versus February 2020, while companies have roughly 9.3 million open jobs. Almost 4 million people quit their jobs in April, the highest on record, and a record-high 2.7% of total employment. If you’re an employer and, even after raising wages, it’s hard to find workers for open positions and keep the workers you have, it certainly is a “tight” labor market.

So, what is going on? Is the job market tight, or not? We think the best way to describe it is “fake tight.”

The key problem with the labor market right now is that the government is still giving out unemployment benefits far in excess of what the situation demands. Sending out these jobless benefits might have made sense in the early days of the pandemic, back when the government’s shutdown-heavy response to COVID-19 amounted to a “taking” of many people’s businesses and livelihoods. That was an incredibly unusual situation. And while we think it was a mistake, if the government “takes” away your job for public health reasons, it’s logically consistent to “compensate” you for it.

But, at this point, with the economy open, and baseball stadiums packed with unmasked people in Los Angeles and Chicago, the time for excess benefits has long passed; it’s time to get back to normal.

In fact, the entire government response needs to be rethought. The Federal Reserve is still holding interest rates near 0% and buying $120 billion worth of bonds every month, as if the US were still in a financial crisis. If there is a problem with the economy, the Fed is exacerbating it by helping to finance the governments competition with the private sector. The Fed’s buying government debt to finance redistribution, perpetuates the unemployment problem and hurts business.

And this may be worse than many investors think. While there are 9.3 million people counted as unemployed, current regular and special pandemic-relief programs are paying 14.8 million people unemployment benefits. The difference is largely due to the special temporary laws allowing people to collect jobless benefits even if they’re not looking for work. Usually that’s a No-No, but Congress decided to waive the job seeking requirement due to COVID.

No one knows the end result of all these “unprecedented” policies. And since they were started in response to economic shutdowns, they should end as the economy opens up. What the US should do is either cancel them immediately or repurpose this money to “infrastructure” so that economy-killing tax hikes are not part of the current budget plans.

In the meantime, the system is awash in money. This lifts asset values, in spite of problems in the labor market. Moreover, interfering with the dynamics of the labor market reduces output while increasing consumption, which is a recipe for inflation. We think all these problems are easy to see. If the labor market really was “tight,” the Fed would not need to be so easy. And a “fake tight” labor market needs less accommodation, too.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

6-22 / 9:00 am Existing Home Sales – May 5.710 Mil 5.790 Mil 5.850 Mil

6-23 / 9:00 am New Home Sales – May 0.867 Mil 0.868 Mil 0.863 Mil

6-24 / 7:30 am Initial Claims - Jun 19 380K 390K 412K

7:30 am Q1 GDP Final Report 6.4% 6.5% 6.4%

7:30 am Q1 GDP Chain Price Index 4.3% 4.3% 4.3%

7:30 am Durable Goods – May +2.8% +1.8% -1.3%

7:30 am Durable Goods (Ex-Trans) – May +0.7% +0.7% +1.0%

6-25 / 7:30 am Personal Income – May -2.6% -2.7% -13.1%

7:30 am Personal Spending – May +0.4% +0.2% +0.5%

9:00 am U. Mich Consumer Sentiment- Jun 86.5 86.4 86.4

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Taper Tantrum Two?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

June 14, 2021

To drive home his commitment to easy monetary policy and low interest rates in mid-2020, Federal Reserve Chairman Jerome Powell declared the Fed was not even “thinking about thinking about raising rates.”

The Fed meets again later this week and, very likely, is still not thinking about thinking about raising rates. But that’s only part of the Fed’s tool kit. Bond purchases are another, and have been running at a pace of $120 billion per month ($80 billion in Treasuries and $40 billion in mortgages). With inflation up, and the economy growing, the Fed is most certainly thinking about how to “taper” this bond buying.

As a result, some investors are worried about the impact on financial markets. Back in 2013, when Fed Chairman Ben Bernanke hinted that the Fed would slow the pace of quantitative easing, the 10-year Treasury yield jumped from roughly 1.7% to 3.0%, while the stock market hit an air-pocket. This rough patch for markets was famously dubbed the “Taper Tantrum.”

That financial turbulence was enough to put Bernanke and the Fed back on its heels, and they ended up postponing actual tapering until the beginning of 2014.

So, what happens this time? It’s true that monetary stimulus has been a key part of the current recovery from pandemic shutdowns. However, with so much liquidity in the financial system, we are skeptical that a policy shift toward tapering would create the same kind of market response for a few reasons.

First, the bond market has experience with tapering. When tapering finally ended in October 2014, bond yields were back down to about 2.3%. In other words, the tumult in markets was temporary. Eventually, the Fed didn’t just taper, it shrunk its balance sheet, which bottomed in August 2019 when the 10-year yield was back down to about 1.6%. So, after all the fear about tapering, yields eventually fell back to where they were before Bernanke even talked about tapering in the first place.

Second, the US is awash in monetary liquidity, and will remain so through any tapering and well beyond. That’s why the Fed is currently conducting massive reverse repo operations. There is so much cash that the financial system is perfectly willing to park it at the Fed…which, if you think about it, is a kind of self-tapering. The money is just not necessary for economic growth.

Third, the need for Fed bond buying to finance government spending is waning. President Biden originally asked for close to $4.3 trillion in extra spending for the next ten years, but Congress has balked. The White House might have to settle for as little as $1 trillion, maybe even less, depending on negotiations with Congress. Moreover, part of the spending package may come from money re-purposed from prior spending bills. No wonder bond yields fell last week even while consumer prices rose rapidly.

Last, it’s important to keep in mind that back in 2013, many, many investors were worried about a double dip recession. As a result, when the Fed said growth was strong enough to taper, higher bond yields were a sensible response.

Today, investors see rising growth due to reopening and higher inflation because of easy money. This is not 2013, when consumer prices were up only 1.7% in June versus the prior year. Now, when a taper is announced it’ll be the Fed signaling it’s getting slightly more serious about inflation.

A taper at this point, is NOT tightening. As a result, yields should be higher a year from now, but a tantrum-like surge is unlikely.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

6-15 / 7:30 am Retail Sales – May -0.6% -0.8% 0.0%

7:30 am Retail Sales Ex-Auto – May +0.4% +0.6% -0.8%

7:30 am PPI – May +0.5% +0.6% +0.6%

7:30 am “Core” PPI – May +0.5% +0.4% +0.7%

7:30 am Empire State Mfg Survey – Jun 22.0 21.5 24.3

8:15 am Industrial Production – May +0.6% +0.6% +0.5%

8:15 am Capacity Utilization – May 75.1% 75.0% 74.6%

9:00 am Business Inventories – Apr -0.1% -0.1% +0.3%

6-16 / 7:30 am Housing Starts – May 1.640 Mil 1.645 Mil 1.569 Mil

7:30 am Import Prices – May +0.8% +0.3% +0.7%

7:30 am Export Prices – May +0.8% +0.2% +0.8%

6-17 / 7:30 am Initial Claims – Jun 12 360K 370K 376K

7:30 am Philly Fed Survey – Jun 31.0 38.7 31.5

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.