September Economic and Market Review

Economic and Market Review

September 30, 2021

Equity Indices

YTD Return

 

Bonds

Yield

Dow Jones

10.58%

 

2yr Treasury

0.28%

S&P500

14.68%

 

10yr Treasury

1.52%

NASDAQ

12.11%

 

10yr Municipal

1.13%

MSCI – Europe

7.97%

 

US Private Agg

2.22%

MSCI–Emerging

-2.96%

 

 

 

 

Commodities

Price

 

Currencies

Rate

Gold

$1,756/oz

 

USD/CAD

$0.78

Silver

$22.15/oz

 

USD/GBP

$1.34

Crude Oil

$75.19/barrel

 

JPY/USD

¥111.65

 

Americans Tapping Savings

As store and restaurant closures prompted consumers nationwide to stay home last year during the height of the pandemic, consumers spent less, and saved more. In addition, massive stimulus efforts by the government placed funds in millions of consumer savings accounts last year, helping to shore up the savings rate as well.

The most recent savings rate data made available reveals that consumers are now saving less, perhaps tapping their savings accounts as prices have increased and stimulus payments have vanished. The personal savings rate as of October 1, 2021 stood at 9.4%, down from 33.8% in April 2020.

Dwindling consumer confidence along with uncertainty surrounding the job market, shifted many from a spending mode to a saving mode in 2020. The average savings rate for the past 60 years has been 8.9%. The savings rate jumped from 8.4% in February 2020 to 33.8% in April 2020 as the pandemic took hold of the U.S. economy.

Economists view the decrease in savings part of a sustained economic expansion. Since nearly 70% of Gross Domestic Production (GDP) is represented by consumer expenditures, higher savings tend to take away from spending throughout the economy. Consumer confidence is also a factor as a lack of confidence tends to increase savings while minimizing spending.

Congressional Stand-Off Over Debt Ceiling

A Congressional standoff surrounding raising the debt limit led to increased market volatility as a political debate lingered. Impasses regarding the debt ceiling have occurred numerous times since the limit was established in 1917.

Formally known as the statutory debt limit, the United States debt ceiling or debt limit is a legislative restriction on the amount of national debt that can be issued by the Treasury. The debt limit has been raised 79 times since its creation in 1917, with 17 of these increases occurring over the past 20 years. Periodically, a political dispute arises over legislation to raise the debt ceiling. Until the debt ceiling is raised, the Treasury undertakes what is termed as “extraordinary measures”, which essentially buys more time for the ceiling to be raised.

The United States has never reached the point of default, where the Treasury is unable to pay its obligations. In 2011 the United States reached a point of near default, which in turn triggered the first downgrade of U.S. debt by credit rating agencies. Congress raised the debt limit with the Budget Control Act of 2011, which led to the fiscal cliff and set a new debt ceiling that was reached on December 31, 2012. The current debt ceiling debate in Congress is expected to lead to a debt ceiling increase sometime in the first quarter of the government’s fiscal year, which begins October 1 of each year.

Household Income Drops as Inflation Pressures Rise

The median household income fell in 2020 for the first time since 2014, according to the most recent Census Bureau data released in September. Widespread stimulus payments, as well as enhanced unemployment benefits, were not enough to match prior year incomes in 2019. As of the end of 2020, the median household income was $67,521, a drop of 3% from 2019. Even though it doesn’t appear to be much of a consequential drop, inflation pressures are becoming more of a concern. Census Bureau data is adjusted for inflation, albeit at only 1.25%, which is the U.S. Bureau of Labor Statistics’ calculation.

Analysts suspect that the inflation rate may actually be much higher, perhaps approaching the 50-year average of 4.1%. Because of this, some economists believe that median incomes are not keeping up with inflation and stripping many households of their purchasing power.

Economists are noting that wage gains have been trailing price gains throughout the economy, meaning that consumers are able to buy less. Rental costs, the largest expenditure for many consumers, are expected to increase as forecast by the Federal Reserve Bank of Dallas.

Some economists believe that dissipating stimulus payments along with growing inflationary pressures may hinder economic expansion heading into 2022. Also adding to consumer tensions are tax reform measures proposed by Congress that are creating uncertainty surrounding tax and estate planning. Among the proposals are heightened capital gains taxes, reduction in estate tax exemptions, and limits on transferring assets to heirs with favorable tax treatments.

Federal Reserve Signals End to Stimulus

Interest rates rose in September driven by inflationary influences and the Federal Reserve’s signal that it will start alleviating stimulus support by the end of the year. Heightened energy prices along with ongoing supply constraints are stoking inflationary concerns as consumers resume spending on products and services. Gasoline, oil, and natural gas prices rose in September as supply constraints and increased global demand added to price pressures.

COVID-19 Surpasses Spanish Flu

The number of known deaths from Covid-19 in the U.S. has now surpassed the number of fatalities from the 1918 flu pandemic. The CDC reported that over 675,000 people have died thus far, equaling those who died in the 1918 pandemic. Notably different is that the population of the U.S. has nearly tripled since 1918, thus having a smaller toll on the overall population of 333 million.

Volatility Returns as Uncertainty Prevails

Volatility returned in September to U.S. and international equities as central bank stimulus efforts are expected to start unwinding by year end.

Third quarter results for major equity indices revealed that the financial and utilities sectors led the broad markets, with the energy sector leading all sectors year to date.

Equity analysts believe that ongoing supply disruptions have worsened globally as Covid related issues continue to impact factories and ports worldwide. Freight and energy constraints continue to add costs to companies posing a material risk to profit expectations.

Crypto Tug-of-War

Cryptocurrency has become highly disputable among various world governments. September saw two significant opposing positions for digital currency as El Salvador became the first country to adopt a cryptocurrency as its legal tender and China’s Central Bank declared all crypto-related transactions illegal, citing concerns about gambling, fraud and money laundering.

Hybrid Auto Sales Continue to Grow

The adoption of hybrid and electric cars worldwide has been a trend for years, with limited options from only a few manufacturers. A recent surge of new entrants into the market along with rapidly advancing electric motor and battery technology, has provided a flurry of additional options for consumers.

Government subsidies and environmental sensitivity have also helped increase the popularity of hybrid vehicles, thus propelling sales upward. Currently, there is a $7,500 federal tax credit for the purchase of a new electric vehicle. Some Congressional leaders are proposing even larger tax credits and an extension of those credits through 2031.

There are currently over 253 million cars and trucks on U.S. highways, with roughly 550,000 of them electric. Electric vehicles have also grown in popularity in other countries as new models and manufacturers have evolved. China, Japan, the Netherlands and Norway are among the countries with the largest amount of electric vehicles.

Hybrid auto sales have been outpacing electric auto sales as numerous manufacturers and brands have introduced new models prompting competition in the industry. Hybrid auto sales grew to over 454,000 vehicles in 2020, a growing trend from only 9,350 vehicles in 2000, as tracked by the Department of Transportation.

Demand Drives Natural Gas Prices Higher

Natural gas prices soared to levels not seen since 2008 as increased demand and limited supply have pushed prices to nearly triple from where they were in May 2020. Expanding global demand due to an economic rebound from the pandemic has created an energy gap for countries and consumers worldwide.

Becoming a more popular and widely used commodity for energy needs, natural gas has become one of the world’s leading sources of energy, with the United States as the leading producer.

New drilling technology, in addition to the amount of accessible natural gas, has accelerated over the past few years. Numerous companies and agencies, including the Department of Energy, now estimate the nation’s natural gas resource base is so vast that its development is potentially an enormous benefit to the economy and a competitive advantage for many U.S. companies.

Manufacturers in the United States may be among the biggest beneficiaries of abundant and affordable natural gas, since inexpensive power generation is critical for U.S. manufacturers to compete internationally. We are already seeing a revival of some manufacturing in the U.S., partly because of the reduced cost of powering a plant.

In relation to job creation, shale gas production supported more than 600,000 jobs in 2010, a number projected to increase by more than 1.6 million by 2035. The Department of Energy estimates that the United States has not only a significant supply of natural gas, but quite possibly one of the largest worldwide. With such vast amounts of inexpensive natural gas, the U.S. is slowly developing efficient means of not only drilling it, but also exporting it. As the U.S. continues to discover and extract natural gas nationwide, the price drops as supply grows. This elevates the U.S. to becoming an exporter globally, where prices are higher due to increasing demand.