“Until they think warm days will never cease”
-John Keats, “To Autumn”
Here in the Northeast, autumn brings crisp weather. Similarly, the economic outlook has cooled post-Labor Day, owing mostly to COVID’s lingering. While the economy remains on sound footing, the rate of growth is coming into question, particularly in the near term as some “real-time” metrics slow.
Further complicating matters is potential tax increases, heavy M&A activity, and portfolio manager repositioning heading into year-end. These factors make for a potentially volatile Fall outlook.
The New York Fed publishes the Weekly Economic Index (WEI) comprised of ten short-term economic indicators, scaled to match expected GDP increase/decrease. Presently, the index shows an economy running at a healthy 8% growth rate, though declining from its +10% reading at the start of July. Meanwhile, Consensus Forecasts show an expected 4.5% approximate GDP growth rate for 2022, slightly lower than what was expected last month—and considerably lower than 2021’s robust “Post-COVID” re-opening growth.
Real-time metrics show slight signs of a slowing pace. Firms such as Safegraph and Placer.ai publish metrics for retail foot traffic and find modest reductions at locations sensitive to consumer COVID concerns. The same marginal slowdown is present in the TSA daily air traveler passenger counts.
Silvercrest’s baseline economic and earnings expectation model is built on current mainstream thinking surrounding the Delta-variant, expecting cases to peak then fall, one region at a time, over the next couple of months. With that backdrop, we expect the negative effect on the economy to be minimal.
Looking ahead to 2022 with a favorable outlook, we anticipate GDP and earnings growth to be a shade slower than Consensus for each: 4% GDP and 8% earnings growth.
While current P/E valuations of 20.5 based on 2022 consensus earnings estimates are a bit elevated versus the ten-year historical average of 19.5, they are well supported with interest rates at 1.3%. As compared to history, that rate is quite low versus the range over the past ten years of 0.31% (COVID trough) and 5.5% in 2002. Much of the prior ten years has been spent in a range between 2.0% and 3.0% for the U.S. Ten-Year.
A review of Treasury Department data on foreign holders of Treasuries reveals an increase from April to June of $130 billion, a time when rates hovered around 1.5%. This indicates a robust foreign appetite for U.S. Treasuries at that level, potentially pinning rates well below 2.0% for the foreseeable future.
Our outlook, therefore, is for near-term volatility, with valuations remaining largely stable, and with future gains being driven primarily by reasonable earnings growth.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Teeter. No part of Mr. Teeter’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. © Silvercrest Asset Management Group LLC
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