As we find ourselves in the middle of Q3, I wanted to take the time to expand on the three key themes we are currently watching.
The consumer is ready to power the economy forward through the second half of the year. From March 2020 to December 2020, consumers saved an estimated $2 trillion. The personal savings rate jumped to 34% in April of last year, and it remains elevated relative to history. Further, household debt service payments as a percentage of disposable income are near all-time lows, leaving personal balance sheets in tremendous shape. Combining this strong financial positioning with a healthy amount of pent up demand yields, in our view, a very strong American consumer.
We are watching the labor market for additional insight into the path of inflation. Large firms are being forced to present more attractive environments by way of pay increases and work flexibility in order to retain employees. Small businesses, evidenced by data from the National Federation of Independent Businesses (NFIB), are struggling to even field qualified applicants.
This mismatch between demand for labor and labor supply is likely inflationary in the short term, but we do expect to return to equilibrium in the long-term as the world continues down the path to normalcy. The increasing prominence of technology also represents a long-term deflationary force in the labor market.
Although a focus on quality is always beneficial for portfolios, we think quality is particularly well-positioned for the next leg of the economic restart. Coming out of a recession, early cycle names (deeply discounted cyclicals – energy, financials, materials, for example) tend to benefit from an economic recovery.
To get a leg higher, firms will need to prove their worth by way of growth in earnings, free cash flow, and dividends. These are the quality attributes that may lead to outperformance going forward. Further, looking at history, the second year of a secular bull market has traditionally seen sideways trading. This is additional evidence that companies who are competitively insulated and display attractive shareholder return policies are well-suited for the second half of 2021.
While there is an abundance of noise present in the market today, we believe that strong financial positioning combined with pent up demand has the American consumer set to supercharge the U.S. economy. We are closely watching the labor market as an indicator for the trajectory of inflation. Finally, we emphasize the role of quality in portfolios, especially when using history as a guide.
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