July 30th, 2021
Stocks appeared to be on their way to another record-breaking week as Q2 2021 corporate earnings continued to surprise to the upside, U.S. economic activity returned to pre-pandemic levels, and the Federal Reserve signaled it would maintain its easy monetary stimulus program. As more earnings results poured in this week, the corporate earnings growth rate expanded to 79.20% year-over-year (yoy). That’s up strongly from analysts’ initial forecast calling for 67.70% yoy growth. The U.S. economy maintained its re-opening momentum from the first quarter to the second quarter as U.S. GDP rose 6.50%. That came on the back of strong consumer spending, supported in large part by a drop in the personal savings rate. Unfortunately, investors were unable to make it another winning week as Amazon’s earnings results weighed on the S&P 500 on Friday. The ecommerce juggernaut reported Q2 2021 revenue that missed estimates and gave weak Q3 2021 guidance. Weakness in Amazon shares pushed the S&P 500 down -0.37% to close out the last trading week of July. However, an overall stronger than expected corporate earnings season and quarter-over-quarter economic momentum helped push the S&P 500 up 1.74% for the month. That was good for a 6th straight monthly gain for the index.
U.S. GDP Returns to Pre-Pandemic Levels
The good times continued to roll for the U.S. economy as strong re-opening momentum pushed Q2 2021 GDP up 6.50%. That was relatively in line with the 6.30% GDP registered in Q1 2021. Growth was driven by consumer spending which rose a robust 11.80% and accounted for 69% of all activity. Nonresidential fixed investment, exports and state and local government spending also contributed to GDP growth. Growth would have been stronger if it were not for a -3.50% drop in domestic investment as declines in private inventory and residential investment held back gains. Inventories have been hard to replenish due to supply challenges leading to higher prices. Rising imports and a -5.00% drop in government spending also served as a drag on growth. Overall, the broad economic re-opening has been good for business as consumers have stepped up to the plate to spend, helping push the U.S. economy back to its pre-pandemic level. Despite the strong optimism that economic momentum will continue into 2H 2021, it will prove difficult for the economy to repeat its 1H 2021 performance as fiscal stimulus wanes, prices rise, and supply bottlenecks persist.
Consumers Raid the Piggy Bank to Lift Spending
For consumers, it’s been one hot vax summer with more people out and about, hitting up their favorite summer spots. Consumer spending was higher by a healthy 1.00% in June, beating estimates for a 0.70% rise. The rise was driven by a 1.20% increase in services, led by spending at restaurants and hotels. Spending on goods also rose, up 0.50% for the month. Spending on long-lasting goods however fell -1.50%, reflecting a decline in motor vehicle purchases. Demand for vehicles remains strong, but the car lot remains largely empty as the continued global semiconductor shortage has kept supply from rolling off the assembly lines. Consumer spending was driven mainly by consumers dipping into their savings accounts which remain flush with stimulus cash. Personal savings topped out this year at $5.9 trillion in March with the personal savings rate hitting 26.90%. However, those savings had been largely drained by June, dropping to $1.7 trillion with the personal savings rate dropping to 9.40%. That’s not too far from the pre-pandemic personal savings rate of 7.80%. The drop signals consumers are getting close to draining their once deep pockets, leaving a rise in income and/or increase in consumer debt as the only sources to drive consumer spending higher if the momentum is to continue at these rates.
With July in the books, investors are looking ahead to what looks like a busy August. Corporate earnings are mostly in the rear view mirror and much better than analysts had forecasted, leaving investors to look for further catalysts to push the market higher. Unfortunately, stocks face some formidable headwinds. Fiscal stimulus is fading with consumers’ savings having been spent and approaching pre-pandemic levels. Prices are likely to remain elevated in the short-term given supply bottlenecks. Lastly, there is a fair amount of uncertainty around what the ultimate impact will be from the delta variant and its impact on consumer demand and business supply. Taken together as we head towards year-end, the cons certainly look much more stacked against the bulls than they’ve seen in some time.
The Week Ahead
August trading kicks off with major reports on nonfarm payrolls, manufacturing, and services.
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The Great Wealth Transfer
The U.S. is about to experience the greatest wealth transfer in history. Baby Boomers, the wealthiest generation, are poised to pass down their accrued wealth to younger generations. The amount is estimated to be upwards of $30 trillion, with some estimates as high as $70 trillion being transferred in the coming decades. However, advisors caution younger generations not to bank on a windfall. According to one survey, nearly 70% of young people expect to get an inheritance, while only 40% of parents plan to leave anything for their children. Families that plan to transfer wealth should ensure that inheriting generations and beneficiaries are well suited and prepared to handle whatever is passed down.
Money and personal finances can be a difficult topic for families to discuss. However, experts overwhelmingly agree that discussing money from an early age can help set future generations up for success. Research shows that by age seven, many kids have established money habits and attitudes, including spending and saving habits and the ability to plan ahead and delay gratification. That doesn’t mean parents have missed some magical window of opportunity if they haven’t discussed these topics before first grade, but it does underscore the importance of modeling responsible financial decision-making and communicating family values around money with children from a young age.
It takes a lot of preparation and work for inherited wealth to endure. A decades-long study of 2,500 families found that by the second generation, 70% of family fortunes have been depleted, and by the third generation, 90% of family wealth is depleted. There is a well-known proverb, “shirtsleeves to shirtsleeves in three generations,” that postulates that the first generation works hard to build the wealth, and the second generation learns from the prior generation’s hard work and is eager to make the same choices that helped their parents achieve success. They have a better understanding of the value of sacrifice, and that awareness helps them make better financial decisions, enabling them to build on the foundation provided by their parents. Subsequent generations benefit from the hard work of prior generations, but may not have an understanding of what it takes to preserve the family’s good fortunes and the lifestyle they now enjoy. They have a tendency to whittle away the family wealth.
One reason heirs may not be prepared is due to a lack of communication. Prior generations may not discuss their finances or what children may inherit because they are concerned about demotivating heirs or heirs seem too young. Furthermore, the conversations can be awkward and uncomfortable, but it is just as important to prepare the family for the money as it is to prepare the money for the family. This includes passing on family values and fiscal responsibility along with financial capital. Sharing the family history and how predecessors worked to earn the family wealth are critical lessons. Making sure that heirs are familiar with the family’s estate plan and understand how it impacts them is another important step. Knowing the priorities and expectations associated with enduring family wealth can contribute to successful stewardship.
Our advisors have been providing education and guidance to individuals and families on both the structural aspects of estate plans as well as on the human aspects of wealth transfer. We understand the impact of inherited wealth and can help beneficiaries navigate the challenges that come with the responsibility. If you have questions about how to sustain a family’s wealth for future generations, please reach out to our office.