by Yieldstreet | Staff
Another month of global equity growth was recorded in August, with a number of developed markets further lifting Covid-19 restrictions. Economic data was strong, though much of the developed world appears to be at, or just past, the peak rate of growth, largely due to the impact of the Delta variant of Covid-19. Overall, global equities delivered total returns of 2.5% in August.
August is typically one of the worst-performing months for domestic stocks, but not this year. US equity indexes again added to their previous record highs over the month with the S&P 500 closing its seventh straight month of growth, a streak that investors have not seen since January 2018. Despite the new highs, inflation concerns, supply-chain constraints, labor shortages and the coronavirus Delta variant have many asking how long the upward trend might last. The University of Michigan’s consumer sentiment gauge, also released at the end of the month, confirmed the market’s nerves as it further deteriorated to the lowest level in nearly a decade.
At the beginning of the month, The U.S. Department of Labor’s August 6th Employment Situation Report showed better-than-expected numbers on job creation, unemployment and wage growth. Employment has risen by an average of about 617,000 people per month so far this year, and despite high inflation, household incomes remain higher than pre-pandemic levels. However, 5 million Americans are still out of work in comparison to pre-pandemic levels and it is about to become tougher for them. Over the course of the pandemic, unemployment handouts increased by $300 per week, but this additional welfare officially runs out following Labor Day so it will be interesting to see how the economy continues to recover without the extra cash in the system. According to US Treasury data through September 1, the cost of unemployment insurance over the pandemic has now surpassed $830B.
Focus quickly shifted from the Employment Situation Report to the Fed’s annual Jackson Hole retreat that was held at the end of August. Chair Powell used the event to provide an update on the U.S. economy, and a timeline and outlook for tapering asset purchases, seeking to ensure inflation does not exceed its 2% target in the long term. His speech helped encourage equities higher as he also emphasized the Fed’s commitment “to support the economy for as long as is needed to achieve a full recovery”. About tapering, Powell hinted that it may begin as early as this year’s end should inflation measures, economic momentum, and employment numbers continue to show progress.
Switching to fixed income, the yield on the benchmark 10-year Treasury increased in August from a low of 1.17% to close at 1.30% at month-end. Despite the increase, yields still sit below March highs of above 1.7%. Corporate fundamentals are very strong, with company credit rating upgrades outpacing downgrades, especially in the high yield market. Corporate profits surged for Q2’21, coinciding with a large amount of liquid assets on their balance sheets allowing them to service their debts. Given the reduced risk and strong backdrop, yields also remain low in this sector of the market.
Asset class commentary
Not a day seemingly goes by without constrained supply-chains making front page news. Over the past 18 months we have seen stores with no toilet paper, a ship blocking the Suez Canal, factory shutdowns in Vietnam, and ports closed in China. The pandemic, and the subsequent disruptions that it has caused, has dismantled the world of just-in-time inventory systems proving just how fragile logistics can be. Just-in-time inventory systems, which grew in popularity during the 1990s, have resulted in companies operating with very lean levels of stock. This strategy helped to reduce overheads as less storage space is required, but for many, operating in this manner became their undoing when the pandemic hit because there was no surplus stock to be found.
As we approach the holiday season, retailers are doing everything necessary to ensure they aren’t caught short. Walmart and Home Depot have taken matters into their own hands and are now chartering private vessels to get their goods on shore because there is no sign of congestion at certain ports easing. Walmart’s ability to adapt quickly and to sacrifice some of their bottom line in the short term by increasing on hand inventory will likely mean it will not face product shortages come christmas time.
Given the pressures on supply-chains right now it is also no surprise that container and dry bulk shipping companies are benefiting as businesses are prepared to spend more to get their goods from point A to point B in the fastest time possible. Smaller carriers were struggling pre-covid as they found it difficult to generate economies of scale like their larger counterparts. However, that trend has changed and small-to-medium carriers are now enjoying a larger share of increased industry profits.
According to the Journal of Commerce Online, double-digit increases in volume were reported by all carriers and accompanied by a sizable increase in the profitability per container transported through the second quarter. The level of profitability across the sector can be attributed to greater demand and rates. To contextualize the increase in rates that we are currently seeing, the average Asia-US West Coast rate valid for 30 days or less in the second quarter stood at $4,200 per forty foot equivalent unit (FEU), more than four times the average second quarter rate in pre-pandemic 2019, according to rate benchmarking platform Xeneta. The average China-North Europe spot rate in the second quarter was $4,771 per twenty foot equivalent (TEU) compared to $736 per TEU in 2019.
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