Respect Millennials

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 18, 2021

Politics today is in large part about pitting one group against another and convincing one side they’ve been treated unfairly. One of those groups is the younger generation of workers known as Millennials, who are supposedly up to their eyeballs in debt and lagging well behind prior generations.

Before we get into it, let’s define who we’re talking about: 

  • Millennials (born 1981-96)

  • Generation X (born 1965-80)

  • Baby Boomers (born 1946-64)

  • Silent Generation (born before 1946)

Politics is a zero-sum game, so instead of focusing on whether the pie is growing or shrinking, politicians and many others like to focus on who owns what share of the pie. In this case the pie we’re talking about is total wealth among all American households. In turn, net worth is assets (stocks, bonds, real estate, mutual funds, bank deposits, pension entitlements, and ownership in businesses) minus liabilities (mortgages, student loans, car loans,…etc.).

As of the middle of this year, Baby Boomers had 51.4% of all net worth, according to the Federal Reserve. Pretty good for a group that makes up about 21% of the US population. Generation X has 28.6% of US wealth.

Meanwhile, Millennials are lagging way behind. This group – which now has 22% of the US population, slightly more than Boomers – has only 5.6% of US household net worth.

It’s no wonder some politicians have been talking about this issue: there are more Millennials than Boomers but Boomers have about nine times more wealth than Millennials. Unfair!

The problem with these numbers is that despite being 100% accurate, they’re 100% misleading. Each generation’s share will rise and eventually fall as they start out young, hit their peak earning years, pay off debts, and then enjoy compounding returns on accumulated investments later on in life, before eventually spending down those assets. Back in 1989, the Silent Generation had almost 80% of all net worth. Today, they have 14.4%.

There is a much better way to look at the generations. Rather than looking at the share of total net worth, we should look at the average level of net worth for each generation as they age from young to old. Essentially, take each generation’s total net worth, divide it by the number of households within each generation (some generations are bigger than others), and then adjust for inflation. Credit where credit is due: this method was originally developed by Jeremy Horpedahl, a very insightful economics professor at the University of Central Arkansas. We gave his method a couple of tweaks and reached essentially the same conclusions.

We estimate that the typical Boomer was born in the fourth quarter of 1955. So, as of mid-2021, the typical Boomer was 65.5 years old. Right now, the average Boomer household has a net worth of $1.629 million. (Remember, this is an average, so it includes Jeff Bezos.) By contrast, the typical Gen Xer now has $1.108 million. (Yes, this includes Elon Musk.)

Superficially, it’s advantage Boomers. But the typical Gen Xer was born in the third quarter of 1972, and so was age 48.75 in the middle of this year. That means Boomers have had longer to accumulate assets and earn compound returns.

But when comparing Boomers to Gen Xers, what we really want to know is how much net worth Boomers had back when they were 48.75 years old. And guess what? When you adjust for inflation, the typical Boomer household had $730,000 back then, well below today’s Gen Xers, with $1.108 million. So when you adjust for age and inflation, the average Gen X household is beating the average Boomer household. (And Bob Stein won’t let Brian Wesbury forget it.)

Unfortunately, the data only go back to 1989, and can’t yet directly compare Millennials to Boomers. But we can compare Millennials to Gen X. Today, the average Millennial household, at age 32, has a net worth of $196,000. (Yes, this includes Mark Zuckerberg.) Back when Gen Xers were age 32, they had an inflation-adjusted $158,000. (And you can be sure Strider, Andrew, and Bryce won’t let Bob forget it!)

The bottom line is that, at the same point in their lives, the average Gen Xer is better off than the average Boomer and the average Millennial is beating the average Gen Xer.

None of this means this pattern will persist. If policymakers obsess about shares of net worth rather than growing the whole pie, they may adopt more policies that slow economic growth and wealth creation and then Millennials could end up being thrown off track. For now, however, it’s important to recognize that Millennials don’t have it as bad as many think.

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

10-18 / 8:15 am Industrial Production – Sep +0.1% +0.1% -1.3% +0.4%

8:15 am Capacity Utilization – Sep 76.4% 76.4% 75.2% 76.4%

10-19 / 7:30 am Housing Starts – Sep 1.615 Mil 1.615 Mil 1.615 Mil

10-21 / 7:30 am Initial Claims – Oct 16 298K 305K 293K

7:30 am Philly Fed Survey – Oct 25.0 30.7 30.7

9:00 am Existing Home Sales – Sep 6.090 Mil 6.140 Mil 5.880 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.

Focus on Data, Not Spin

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 11, 2021

In 2009, after overly strict mark-to-market accounting rules were altered, we said the Financial Crisis was over. It was hard to get our voice heard, though, because both sides of the political aisle were busy saying the economy stunk. Political liberals tried to use the crisis to grow the government and increase bank regulation. Political conservatives said it was a “sugar high” and that President Obama was going to cause a Depression. It was all spin, all the time.

That’s what it seemed like last Friday, when the September jobs report was spun into terrible news.

Yes, nonfarm payrolls rose an underwhelming 194,000 in September, well below the consensus expected 500,000. Meanwhile, the labor force (the number of people working or looking for work), declined 183,000. Some liberals seized on these figures to say (1) the expiration of bonus unemployment benefits didn’t boost jobs like free-market supporters claimed, (2) women are hesitant to get jobs because of COVID and kids at home, and (3) the economy needs more stimulus.

But the jobs report only captured the first couple weeks of expired benefits, and, as a result, it’s too early to tell the real impact of the expiration. Many recipients may have piled up enough savings to be patient in re-entering the labor force. Meanwhile, vaccines, perhaps boosters, and waning COVID case counts should help more sectors return to normal. And if the amount of stimulus applied to the economy already hasn’t worked, what makes anyone confident even more stimulus would work? Wouldn’t it call for a different strategy entirely?

The bottom line is that the employment report really wasn’t that bad. It wasn’t great, but it wasn’t awful, either. Payrolls were revised up a combined 169,000 for prior months. Much of the weakness in September itself was due to public school jobs that are still not back to normal due to COVID. The civilian employment measure of job creation was up a healthy 526,000. And, most importantly, the number of hours worked rose 0.8% in September, the equivalent of more than one million jobs. In addition, wages per hour rose another 0.6%.

At this point, we expect a much stronger employment report for October. Supply chain problems, vaccine mandates at private companies, kids not being back in school…all of this…mean a more volatile economic environment, but easy money from the Fed and less fear of COVID are continuing to boost economic activity. Yes, some disappointing numbers, but the economy has not ground to a halt.

Right now, third quarter real GDP growth looks like it’s coming in soft – at around a 2.0% annual rate, maybe below – and that report arrives just six days before the next Fed announcement. But we also expect both faster job growth and real GDP growth in the fourth quarter. As a result, Jerome Powell is likely to follow through on his intention to start tapering in November. This may cost him his job, but even if the Fed does taper it will still be easy.

As it’s happened in the past, economic reports have become a political football, with each side trying to use the data to score points for their side, greasing the wheel of politics to try to get policy or elections moving in their preferred direction. What’s important for investors is to focus on the data and underlying economic forces, not the narrative driven by politics.

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

10-13 / 7:30 am CPI – Sep +0.3% +0.3% +0.3%

7:30 am “Core” CPI – Sep +0.2% +0.2% +0.1%

10-14 / 7:30 am Initial Claims – Oct 9 320K 320K 326K

7:30 am PPI – Sep +0.6% +0.5% +0.7%

7:30 am “Core” PPI – Sep +0.5% +0.4% +0.6%

10-15 / 7:30 am Retail Sales – Sep -0.2% 0.0% +0.7%

7:30 am Retail Sales Ex-Auto – Sep +0.5% +0.5% +1.8%

7:30 am Import Prices – Sep +0.5% +0.3% -0.3%

7:30 am Export Prices – Sep +0.7% +0.6% +0.4%

7:30 am Empire State Mfg Survey – Oct 25.0 27.3 34.3

9:00 am Business Inventories – Aug +0.6% +0.6% +0.5%

9:00 am U. Mich Consumer Sentiment- Oct 73.5 72.0 72.8

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.

September Market Review

October 6, 2021

September Market Review

Dear Friends and Clients,

Markets prefer clarity – or at least as close a facsimile as they can get. Since the start of the pandemic, we’ve seen how markets can push through uncertainty, up to a certain point.

September, however, brought a stack of compounding uncertainties, combining to end the S&P 500’s seven-month streak. To understand what caused this downward tilt, look to these four Cs:

  • China: The potential default of Evergrande, the Chinese real estate giant

  • Congress: Brinkmanship over the federal debt ceiling and pending legislation

  • Commodities: The rapid oil price hike to values not seen since 2018

  • COVID-19: The continuing surge, even as global lockdowns are at a low point

These and other issues have led Federal Reserve officials and most economists to slightly lower their expectations for 2021 gross domestic product growth.

“Supply chain difficulties have lasted longer and have been more severe than anticipated and will likely continue into the early part of 2023,” Raymond James Chief Economist Scott Brown said. “Inflation forecasts for 2021 have moved higher, though Federal Reserve officials still view much of the increase as transitory. Needless to say, there is a high level of uncertainty in the economic outlook.”

Still, there are good reasons to see the strength underneath this September dip and to consider it in context, Chief Investment Officer Larry Adam said.   

“Market performance highlights the underlying strength and resiliency of this bull market as indices bounced back from their worst day since May and are about 5% from recent record highs,” Adam said. “Fundamentals continue to provide support for this young bull, even as we recommend caution in the short term given the uncertain environment.”

Let’s see where we’re at as we enter the last quarter of the year.

Screenshot (400).png

And here’s a look at some other ongoing and related issues here and abroad: 

Federal Reserve may start drawdown of pandemic policies

The Federal Reserve’s Federal Open Market Committee (FOMC) may slow down its $120 billion per month purchases of long-term securities – a pandemic response – if the economy continues to grow as expected. A plan to taper the purchases through the middle of 2022 could be announced at its November policy meeting, Chair Jerome Powell said. Notably, Federal Reserve officials are not debating when to raise short-term interest rates, but most have moved their preferred timeline forward. They are now evenly split on whether an initial rate hike will occur next year.

Treasuries feed on Fed news

Treasuries sold off following the FOMC meeting, pushing yields higher across the curve. The belly of the curve has seen the most movement, emphasizing that opportunity still exists in high-quality corporate bonds around four to eight years in maturity. Municipal yields have inched higher alongside Treasuries, with the benchmark 10-year, AAA bond yield topping 1.10% for the first time since March.

Congress brings clarity and opacity

This month, we got the first glimpse of details in the much-debated budget reconciliation bill. Things remain hazy – we can expect more details through October. Here’s what we know, with an understanding it’s in flux.

Proposed tax policy changes include:

  • The introduction of a progressive corporate tax rate

  • An increase in the top individual income tax rate to 39.6%

  • A 3% surcharge for individuals with income over $5 million a year

  • An increase of investment taxes to 25%

  • A number of changes to high-balance IRAs and restrictions on Roth IRA conversions

Also being discussed are lower estate tax exclusions, increased IRS enforcement and changes to international taxes. Overall, the known provisions are trending more moderate than those initially proposed by President Biden.

While the Senate and House passed a bill ensuring government funding through early December, a looming debt ceiling showdown is making the future murkier for the markets. Congress will need to act within an October to November time frame to avoid a default. 

The world report

Improvements in job creation numbers didn’t keep European markets from falling modestly through September. Energy prices also pushed higher on a round of fuel panic buying in the U.K. and an unrelated fire that interrupted transmissions with continental Europe. Moving forward, key focuses include third-quarter corporate earnings and the formation of Germany’s next coalition government. 

The Chinese and Hong Kong markets were volatile throughout the month on the heels of Evergrande’s debt uncertainty and the continued evolution of corporate policy in China. In the energy space, Chinese authorities have cracked down on carbon-intensive activities, including cryptocurrency mining and some manufacturing operations.

And while COVID-19 inoculations have continued to build across the emerging markets, rising inflation levels were apparent in many countries, which has led to tighter monetary policy at a number of central banks.

The bottom line

The events that led to September’s retreat are unfortunate, but they by no means indicate the end of a momentous period of growth. I continue to see resiliency in the market as investors have been quick to “buy the pullback” in this low-rate environment. Further:

  • The cure for uncertainty is often time. As issues are resolved – or their effects clearly known –the future-focused markets find confidence again.

  • The underlying market fundamentals remain strong. We see continuing growth despite new issues emerging and old ones hanging on longer than expected.

Thank you for your ongoing trust. I am steadfastly committed to you and your economic well-being and eager to answer any question you may have about this monthly market update, your investments or your financial plan. Please do not hesitate to reach out.

Sincerely,

Matt Signature 2019.jpg



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 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 Cost of Lockdowns

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 4, 2021

Last March, when the government was considering whether to lockdown the economy, we argued that the longer we stayed locked down the more permanent the damage we would do to the underlying economy.

It is now clear that the cost of the lockdowns is immense. We aren’t just talking about the $5 trillion in government borrowing from future generations, but the clear damage done to small businesses and supply chains.

The US economy cannot be switched off and on like a light bulb. Every day, countless decisions are made in order to get the simplest of things on store shelves. One of our favorite economic essays is “I, Pencil” by Leonard Read in which he writes, “not a single person on the face of this earth knows how to make me (the pencil).”

Think about it. We all know the simple components of a pencil (wood, graphite, paint,…etc), but it’s a complex chain of people and events that put it together. Loggers need equipment, food, and clothing. So do all the other suppliers. Each part of the process depends on those before, and if just one part is thrown out of whack, making a pencil gets harder.

Locking down the economy threw complicated supply chains into chaos, and restarting them is not as easy as many seem to think. Markets are robust, and sturdy, but government decisions (made by bureaucrats who, at most, can handle a dozen pieces of information) destroy the information flow necessary for smooth functioning.

Add into this mix that government locked down the supply-side of the economy, while simultaneously providing rocket fuel (through printing and borrowing money) to the demand-side. A massive spike in consumer spending by people who weren’t producing is a recipe for unbalanced markets.

It’s like causing a car accident and saying that morphine is the cure. Once the morphine wears off, the injuries remain, and the pain resurfaces. Here, inflation is one clear result.

We have seen ports in Los Angeles and New York thrown into chaos as ships wait weeks to be unloaded. And the cost to ship those containers has soared by nearly 500%. Dollar Tree, which sells items (many imported) for a dollar, now says they can’t do it anymore and will sell more items for above a dollar.

Oil, gasoline, and natural gas prices are rising. Europe, which also locked down, is heading into the winter with a shortage of fuel. Government attempts to alter a well-established industry by forcing it to create more green energy are failing. Government can’t possibly manage such a complicated system.

The United States Postal Service is slowing down deliveries to save money as financial losses go ever higher. Automobile manufacturers cannot get semiconductors and are seeing production levels, in the face of strong demand, fall behind.

All of this was predictable. A market economy only works when information (through the price system) is allowed to flow freely. Turning it off, or trying to manage it to fit some politician’s utopian vision of the future, creates chaos.

In the economy, there is the “seen,” and the “unseen.” The seen is the fact that you can’t buy toilet paper, or food prices are going up. The unseen is the market system; what Adam Smith called the “invisible hand.” The market provides because people work together as a team, even though they don’t know each other. They do it to earn a paycheck or make a profit.

To call this system “greedy” misunderstands the role of profit, and how resources are allocated by the marketplace. Free markets require unimpeded information. Locking down the economy and attempting to manage it from Washington, DC is guaranteed to create more problems.

One of those is inflation. It isn’t transitory, it’s a natural outcome of decisions that have been made in the past year. Lockdowns will cause more problems than COVID itself.

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

10-4 / 9:00 am Factory Orders – Sep +1.0% +0.5% +0.7%

10-5 / 7:30 am Int’l Trade Balance – Aug -$70.7 Bil -$71.3 Bil -$70.1 Bil

9:00 am ISM Non Mfg Index – Sep 59.9 60.5 61.7

10-7 / 7:30 am Initial Claims – Oct 2 350K 340K 362K

2:00 pm Consumer Credit– Aug $17.3 Bil $20.0 Bil $17.0 Bil

10-8 / 7:30 am Non-Farm Payrolls – Sep 488K 575K 235K

7:30 am Private Payrolls – Sep 450K 545K 243K

7:30 am Manufacturing Payrolls – Sep 25K 25K 37K

7:30 am Unemployment Rate – Sep 5.1% 5.1% 5.2%

7:30 am Average Hourly Earnings – Sep +0.4% +0.4% +0.6%

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

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.

Less Government, More Employment

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

September 27, 2021

Usually, the most important economic data report every month is the Employment Report and usually that key report comes out the first Friday of every month. But this month is throwing one of those periodic knuckleballs and so we need to wait an extra week, until Friday October 8.

Nothing strange is really going on, and there’s no reason for conspiracy-thinking. Both the payroll report and the employment survey – which give us the nonfarm payrolls and unemployment rate data, respectively – are based on the week of the month that includes the 12th.

Well, September 12 was a Sunday this year, which means that key week (September 12 – 18) fell relatively late in the month. Some months, the key week is relatively early, starting the 6th and running through the 12th. In turn, a relatively late survey week mixed with the first Friday of the month being October 1 means there is too little time to put together the report.

Right now, the consensus among economists is that nonfarm payrolls grew 513,000 in September, while the unemployment rate dropped to 5.0% from 5.2%. We will come out with our own forecast at the end of this week, and then might adjust it based on incoming data on jobless claims and the ADP jobs report. So, for all we know, the current consensus might be exactly right. After all, payrolls are up 503,000 per month in the past year and up 586,000 per month so far in 2021, so what the consensus is forecasting is more of the same.

But what the consensus seems to be overlooking is that the national system of overly generous unemployment benefits that had been in effect since COVID-19 hit the US ran out on Labor Day weekend. As a result, many unemployed people who had previously been getting payments in excess of what they could have earned while working are no longer able to do so.

We think this should translate into a major surge in job growth in September or October, and think there is enormous upside potential for the next two jobs reports. No one should be surprised if one of those reports shows as much as two million net new jobs. Seriously.

Keep in mind that not all of these jobs have to be real job creation; much of it could be workers who were being paid “under the table” to preserve their unusually high jobless benefits moving back toward regular “on the books” employment.

Meanwhile, with more people looking for work the unemployment rate might not fall as dramatically as that kind of surge in job creation would normally predict. One of the reasons the jobless rate has dropped so quickly in the past year or so is that the number of people pursuing work (on the books) has dropped. Now, there is more reason to look for work.

Yes, we are well aware that some news outlets have published stories about the states that curtailed extra jobless benefits earlier in the summer not getting extra job creation, but this analysis was very weak. For example, it failed to control for other factors, like the extra COVID cases/hospitalizations that many of these states had this summer. Nor did they control for the smaller remaining pool of available labor in these states. In addition, the rollout of the child credit may have temporarily dampened job creation nationally.

The US economy is far from fully healed from the COVID19 disaster. But now that the government has stepped back from extra large payments to the unemployed, we think the labor market is on the verge of a big step forward.

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

9-27 / 7:30 am Durable Goods – Aug +0.7% +0.7% +1.8% -0.1%

7:30 am Durable Goods (Ex-Trans) – Aug +0.5% +0.4% +0.2% +0.8%

9-30 / 7:30 am Initial Claims – Sep 26 330K 335K 351K

7:30 am Q2 GDP Final Report 6.6% 6.8% 6.6%

7:30 am Q2 GDP Chain Price Index 6.1% 6.1% 6.1%

8:45 am Chicago PMI - Sep 65.0 69.1 66.8

10-1 / 7:30 am Personal Income – Aug +0.2% +0.1% +1.1%

7:30 am Personal Spending – Aug +0.6% +0.7% +0.3%

9:00 am ISM Index – Sep 59.5 59.5 59.9

9:00 am Construction Spending – Aug +0.3% +0.5% +0.3%

9:00 am U. Mich Consumer Sentiment- Sep 71.0 71.0 71.0

afternoon Total Car/Truck Sales – Sep 13.2 Mil 13.5 Mil 13.1 Mil

afternoon Domestic Car/Truck Sales – Sep 10.0 Mil 10.1 Mil 9.8Mil

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.

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 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:

Screenshot (282).png

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,

MG Signature.jpg

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.