Great-West Investments Capital Markets Perspective

th th Week in Review: June 27 – July 4

% CHANGE % CHANGE (THROUGH (THROUGH INDEX/ ASSET LEVEL FRIDAY’S CLOSE) INDEX/ ASSET LEVEL FRIDAY’S CLOSE) SECURITY CLASS (CLOSE) 1 WK. YTD SECURITY CLASS (CLOSE) 1 WK. YTD Dow Lg. Cap Eq. 34,786.35 1.02% 14.50% FTSE 100 UK Equity 7,123.27 -0.18% 10.26% Industrials Japan S&P 500® Lg. Cap Eq. 4,352.34 1.67% 16.67% Nikkei 225 28,783.28 -0.97% 4.88% Equity NASDAQ Emkt. US Equity 14,639.33 1.94% 13.98% EEM:US $54.78 -1.30% 6.53% Comp. Equity

S&P Midcap Mid-Cap Non-US 2,709.57 -0.62% 17.47% EFA:US $79.34 -0.80% 8.68% 400© Equity Equity

Russell Sm. Cap UST 10y US 2,305.76 -1.23% 16.53% 1.43% -0.10% 0.52% 2000® Eq. (yield) Treasury B/Barc Stoxx 50 Europe Eq. 4,084.31 -0.88% 14.36% Fixed Inc. 2,356.68 0.54% -1.39% AGG

Four-for-four.

One of the few things that I can every July is my neighbors shooting off pooch-panicking fireworks late into the night on the fourth. But just as inevitable (and almost as annoying,) is the lazy, hackneyed over-use of analogies during the weeks just prior to the All-Star break. Since “lazy” and “hackneyed” are two things I’m not afraid of being labeled, here goes: last week, the labor market went four-for-four.

First up, payroll processor ADP estimated on Wednesday that slightly more than 690,000 new jobs were created last month1, a deceleration from May’s reading but comfortably ahead of economist’s expectations. Then on Thursday, outplacement specialist Challenger Gray and Christmas reported that US employers announced fewer than 21,000 layoffs last month – the lowest seasonally-adjusted monthly total in 21 years, and low enough to keep the year-to-date total number of pink slips to the lowest seen during the first six months of any year since 1995.2 That better-than-expected report was followed by a weekly jobless claims number that was also comfortably below estimates3.

That loaded the bases for Friday’s clean-up hitter: the closely-watched labor situation report from the Bureau of Labor statistics. While that report wasn’t quite a home (more like a ,) it was solid enough to move a few of the baserunners around the diamond. For those keeping score at home, here are the details: according to the BLS’ estimate, the US economy added an estimate-beating total of 850,000 jobs during June, while participation rates held steady and hourly earnings advanced 0.3%. The unemployment rate ticked marginally higher, reaching 5.9%4. So again, not exactly an all-star , but still enough to generate a few runs for the home team.

As anyone who watches baseball can tell you, hitting a bunch of singles (with an occasional extra-base thrown in for variety) is a great way to win a lot of games, and last week’s jobs market data certainly represented progress toward the

1 https://adpemploymentreport.com/2021/June/NER/NER-June-2021.aspx 2 https://www.challengergray.com/blog/job-cuts-fall-to-lowest-monthly-total-in-21-years-20476-planned-cuts-in-june/ 3 https://www.dol.gov/ui/data.pdf 4 https://www.bls.gov/news.release/empsit.a.htm goal of defeating the COVID-induced slump in employment. But caveats to economic data are just as inevitable as fireworks on the fourth (or the abuse of sports metaphors in market commentary,) and each of the above-referenced reports contained at least one “yeah, but...” For example, both ADP and the BLS reports suggested that many of the jobs added last month were simply re-hires in sectors hit hardest by the pandemic, such as leisure and hospitality. That’s certainly great news (particularly if you work in either leisure or hospitality,) but it does little to help alleviate some of the more visible COVID-related dislocations that threaten to exacerbate the supply chain woes that we’re all reading so much about.

That’s potentially a big deal because without some relief, supply chains already stretched thin amid surging demand and persistent issues surrounding supply could reach a breaking point. By way of example, the Challenger layoff report referenced above went of its way to point out that roughly 6,000 autoworkers have been sidelined by one of the more visible COVID-related supply chain hiccups5: a persistent shortage of semiconductors that has caused carmakers to re-idle some plants that may have previously been shut down more directly as a result of the pandemic.

But either way, last week’s jobs-related data seemed to hit the market’s : strong enough to represent progress, but not so strong as to re-ignite worries about premature tightening by the Fed. That was enough to allow at least some segments of the equity market to perform well last week.

But meanwhile, those same supply chain issues remain front-and-center of the current economic narrative just about everywhere you look. In what was perhaps last week’s best example, a majority (61%) of respondents to the Dallas Fed’s monthly manufacturing survey6 said they are currently experiencing significant issues related to materials and logistics, and a majority of those who answered “yes” said those issues had worsened in the last month. That was a significant worsening over the last time the Dallas Fed asked the same question. Meanwhile, seven in ten respondents said they can’t find qualified applicants for open positions, repeating a refrain heard over and over again in other regional Fed surveys (as well as other high-quality business surveys such as the ISMs and PMIs.)

Speaking of which, we got more of the same from both of those organizations last week as well. Markit Economics’ final read on the June manufacturing PMI, for example, pointed out that vendor performance – which could just as easily be read as “supply chain issues” – deteriorated to its worse levels ever, while cost pressures took their biggest leap ever7. And it’s not just here in the US, either: global PMIs8, also released last week, bemoaned rising costs, worsening vendor performance to pretty much the same extent as the US-only version. It’s fair to question whether those issues will eventually begin to cause macro data – which remains unquestionably strong in spite of such pressures – to plateau or even soften in the near future.

So whether it comes in the form of a Fed-conducted survey of manufacturers, a poll of purchasing managers, or even the words of harried executives prepping investors for next quarter’s earnings season, the central theme is coming through loud and clear (as well as surprisingly consistent): the demand side of the equation is fine (red-hot even,) but the supply side is under increasing stress as a result of a litany of issues including rising costs, tangled logistics and a lack of qualified and willing labor. Whether or not the robust post-COVID rebound will continue is a function of how well individual actors within the economy deal with these issues in the coming months.

5 Ibid. 6 https://www.dallasfed.org/research/surveys/tbos/2021/2106q.aspx 7 https://www.markiteconomics.com/Public/Home/PressRelease/0501c114d9194cb889d175b0ba828bf1 8 https://www.markiteconomics.com/Public/Home/PressRelease/306fe32ac993444d83dc666c249f8d52

What to Watch This Week: July 5th – 12th

Notable economic events (July 5th – 9th) Monday: US markets closed Tuesday: ISM/PMI services Wednesday: Fed minutes, JOLTS Thursday: Weekly claims Friday: G-20 Summit begins

It should be a very quiet week on the economics front, with very little in the way of scheduled economic data. Tuesday’s ISM/PMI data for the services sector is probably the most interesting release on the calendar and will likely show that the robust, post-COVID recovery has maintained pace. As with similar surveys covering the manufacturing sector, the key question in this and future ISM/PMIs will be whether surging costs, supply chain stress and labor supply issues will relent, or eventually cause these surveys to tip over. For now, though, it’s reasonable to expect to see continued strength.

Meanwhile, the Federal Reserve remains at the absolute center of the economic universe. Beginning with a subtle revision of the so-called “dot plot” two weeks ago, investors are once again questioning the Fed’s commitment to keeping policy accommodative as inflation continues to dominate public debate. Recent speeches by Fed officials haven’t exactly clarified where the Committee stands, with some officials suggesting that a tapering of asset purchases may be imminent while others continue to suggest that such a normalization of policy is still a long way off. Wednesday’s release of the minutes of the FOMC’s June 15-16 meeting may provide some additional clarity, but I probably wouldn’t expect too much.

Labor markets remain a key focus for capital markets as well. This week, we get a more detailed view of the world as seen through the lens of a job-seeker, with the release of the May JOLTS (Job Openings, Leaving and Turnover) survey. As recently as last month, the ratio of jobs- to job-seekers was very close to 1.0, an indication of an unusually tight market for labor, particularly during recession. Similarly, the “quits ratio,” a closely-followed line-item in the JOLTS report that is often seen as an indication of how confident the average worker is about finding another job, reached an all-time high last month. Taken together, these two forces could eventually become a recipe for accelerating wages as employers resort to extraordinary measures to attract talent. Given the market’s intense focus on inflation, these things could make Wednesday’s JOLTS report one of the more worthwhile reads on the calendar this week.

On the policy front, finance and economics officials from the world’s 20 largest developed countries will convene in Venice for the first in-person G-20 Summit since COVID-19 appeared. Among the issues on the agenda is a discussion of the idea of a minimum corporate tax, which would effectively set a floor of 15% on taxes paid by the world’s larger corporations9. The program has already won the support of the G-7 as well as more than 100 other countries, and official endorsement by the broader G-20 group of nations could be an important step that allows for formal implementation of a global minimum tax within two years. While the practicalities of maintaining any such program without significant leaks and loopholes would seem to be challenging (to say the least,) one area where an approval by the G-20 could have an immediate impact is by providing some degree of political cover for efforts here at home to boost corporate taxes, which by itself makes this week’s debate by the G-20 worth watching.

Source for index data: Bloomberg.com; GWI calculations.

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9 https://www.reuters.com/business/countries-backs-global-minimum-corporate-tax-least-15-2021-07-01/