Crescent Park & Recreation – US Premium

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Dear Partners & Friends,

We hope you had a great summer and are looking forward to a fruitful fourth quarter. September proved to be a disappointing month for equity markets after a strong YTD (and August). As a reminder, the S&P 500 was up 20.4% through the end of August before giving up just under 5% in September. Here are a few things we found interesting and wanted to share with you as we enter the final three months of 2021.

I. US Markets Warrant a Premium.

There has always been an argument made to more broadly diversify equity holdings around the world. Over the past ten years, however, those who were over-weight US equities significantly outperformed their more globally diverse peers. Strong demand for US equities has led to higher valuations on US shares over time. However, the following tables indicate that stronger and more stable long-term earnings growth in the US warrants this premium.


Source: Alpine Macro

II. Raise my Limit.


Janet Yellen has not been shy in warning about the implications of a US debt default in mid to late-October. In a recent WSJ editorial, she argued that the US has never defaulted on its debt and shouldn’t start doing so now (particularly during a continuing public health emergency). She points out that during the previous administration, Congress suspended the debt ceiling three separate times all with bipartisan support.

III. If You Can’t Beat Them, Weaken Them.


As variants of Covid-19 continue to frustrate global governments and markets, the realization that the virus is here to stay has settled in. As a result, some of the focus has shifted to lessening the virulence of the virus rather than eradicating it. A phase 3 trial of Merck and Ridgeback Biotherapeutics’ oral antiviral treatment, “molnupiravir”, showed the drug reduced the risk of hospitalization or death by around 50% in Covid-19 patients. Like similar anti-viral medications, “molnupiravir” works by inhibiting the replication of coronavirus inside the body.

IV. Housing Boom or Bubble?


During the Covid-19 pandemic, home prices have climbed at a record pace. The median price for an existing home reached over $363,000 in June 2021, a 23.4% year-over-year increase. Speculation is certainly a factor in this marked increase in prices, however, record low interest rates and lack of supply have been contributing as well. According to the National Association of Realtors, the US has underbuilt its housing needs by at least 5.5 million units over the past 20 years. Prices continue to go higher despite what you may be getting for the money.

All the best,
Pete

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