August 2021
Market Update

Clouds have gathered on the horizon today.  Over the McDowell mountains, we see dark skies ready to dump some summer monsoon rains on the Phoenix area.  A typical summer in the desert.  Curiously enough, our “normal” summer – much welcome after a miserably hot record-breaker last year – has seemed cool and comfortable compared to the summer “heat dome” hitting so many parts of our country this year. 

At the beginning of the year, with the vaccines ramping up and virus cases beginning to decline, it seemed like we could count on 2021 to bring us back to normal.  Mother Nature not withstanding, we have seen other clouds gathering as supply chain disruptions have triggered a series of economic challenges this year, just when we should be enjoying a robust recovery.

From skyrocketing lumber prices peaking at over $1400/board foot, to a housing market frenzy that saw fierce bidding wars, to shortages in any number of items: jet fuel, lumber, paint, aluminum, pvc, and microprocessors.  Each of these shortages fueled problems elsewhere – housing starts, remodeling projects, automobile sales and rental car shortages, to flight disruptions.  Prices moved higher and so have bad tempers, while corporate profits and sales have stumbled a bit this quarter.

In defense of the Federal Reserve’s position that these price movements and inflation are transitory, we have seen lumber prices drop dramatically from the May peak, to $624 per board foot today.  The housing market is showing signs of relaxing, but no signs of crashing, as buyers have decided to be more patient and more homes are slowly coming to market.  Prices remain much higher today than they were a year ago, even if bidding wars have stopped being the norm.

The economic data we will be watching now is wage growth.  During the Great Recession of 2008, we lamented the fact that most workers’ wages did not participate in the bull market that followed the crisis.  In fact, after adjusting for inflation, the purchasing power of your average worker looked like they were back in the 1990’s.  This April, job openings set a record for 9.3 million openings, a record high not seen since 2000.  Depending on the state and the employer, there have been offers to “new” employees of signing bonuses, even cash for just coming in for an interview!  In an effort to retain employees, Walmart is offering free college education to all its employees.  Blackrock is rewarding all employees, up to the officer level, with 8% pay increases.  Morgan Stanley and Chase also recently bumped starting salaries for their investment managers from $85,000 to $100,000.  Help wanted signs are everywhere and employers are getting creative. 

Here is the problem.  Wage growth like that is persistent and will not be transitory.  Lumber prices may have dropped sharply, real estate sales may have peaked, but payroll numbers will have long term implications for corporate profitability and consumer prices. 

Once the Federal Reserve admits this means “real” inflation, it will require great finesse to keep markets calm as the accommodative environment stocks have enjoyed for over a decade begins a new chapter.  We will be discussing inflation and the Federal Reserve’s options in our upcoming quarterly Zoominar, so mark your calendars now for Wednesday, August 24th at 11 am MST – 11 am for Arizona and noon for Utah.

In your portfolios here, we remain fully invested but watchful. During the month we saw volatility spike as the growing number of COVID cases raised some concerns about the potential to slow the recovery. In the end, the S&P pulled out a positive return for the month, up 2.44%, followed by the tech-heavy NASDAQ at 2.86% -but all other segments of the market posted losses, with emerging markets and small cap stocks stumbling the most. Our bond portfolio held steady and we will have picked up another month of dividends this week.

School has started back in Arizona and we are all happy to see our kids back where they need to be, even though we still have some challenges ahead.  With school starting, can Christmas be far behind?!  Before we get there, however, we did want to announce we have resurrected the Utah client appreciation event!  September 29th we will be hosting a bbq and soccer match at the Real Salt Lake.  Watch this newsletter and your email for upcoming details on how to register.

We hope you are enjoying the last of your summer!

If you have questions, please contact us.

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