July Economic Update
Stocks moved higher last month as investors looked past accelerating inflation and the Fed’s unfavorable pivot on their monetary policy. While the Dow Jones Industrial Average slipped -0.07%, the S&P 500 Index rose 2.22% with the Nasdaq leading the pack by gaining 5.49%. (1)
The May Consumer Price Index came in above expectations. Prices increased by 5% for the year-over-year period - the fastest rate in nearly 13 years. Despite this unsettling surprise, the markets rallied on the news, leaving some investors questioning whether this will be the peak inflation that we will see in 2021. (2)
Many are now questioning whether deflationary forces may start to impact the economy into the second half of the year. With stimulus money subsiding, eviction moratoriums expiring, supply chains begin to normalize, and signs that real estate might be starting to stagnate, the hottest inflationary data could be behind us.
Existing home sales dropped for the fourth consecutive month, sliding 0.9% in May. Inventory shortages and declining affordability continue to weigh on the market with sellers afraid to list their homes for sale in fear of their own inability to purchase another home. While sales of new homes fell 5.9%, the median sales price rose to a record $374,400. (3,4)
Some members of the Federal Reserve have hinted that the monetary policy put in place in March 2020 may need adjustments, which may include the Fed’s tapering of their corporate bond purchasing program, in addition to a rise in interest rates sooner than anticipated. A number of Fed committee participants had raised the idea that—if the economy continues to make progress—it might be appropriate to adjust the pace of the Fed’s monthly bond purchase program. But for now, there are no official announcements for any changes this program.
Federal Reserve Pivot
The Federal Reserve indicated that two interest rate hikes in 2023 are likely, despite signals as recently as March that rates would remain unchanged until 2024. The Fed also raised its inflation expectations to 3.4%, up from its March projection of 2.4 percent. However, Fed officials continue to maintain that price increases will be transitory even though there has been no indication of when or by how much the Fed may begin tapering its monthly bond purchases. (5)
This news unsettled the markets in the days following the announcement, but a rebound ensued the following week. The bond market reacted with sharp moves which flattened the yield curve which is often an indication for potentially increasing risk for equities.
As second-quarter earnings season approaches, investors will see whether Corporate America can build upon its first-quarter results. Expectations for increased earnings are high, driven in part by projections of 20% sales growth.
However, it is worth noting that first quarter earnings reports rose 52% with an 11% increase in sales. In spite of these stellar numbers, the market’s reaction was muted, raising some uncertainty whether second-quarter numbers will have the same result. If earnings do not meet the high expectations and stock valuations which are already priced in, analysts may find themselves reevaluating prices over the coming months. (5)
Wall Street will be keeping a close eye on inflation data over the next month, in addition to the signals being given in the bond market which contradict the high CPI prints seen last month. Additionally, as state and government enhanced unemployment benefits and eviction bans begin to end in July and August, much attention will be focused on employment and wage data.
While the stock market is currently trading at or near all-time highs, it is important to keep a balanced perspective regarding the potential risks which may lie ahead. In the first half of 2021, we witnessed a tremendous run for equities as the economy rebounded out of the grasps of the pandemic. We remain cautiously optimistic that we can continue to see more upside into the second half of the year.
Monthly Financial Tip:
Cancel monthly charges for services or products you do not use or need. If you change your mind, you can always re-signup at a later time.
1. The Wall Street Journal, June 30, 2021
2. CNBC.com, June 10, 2021
3. CNBC.com, June 22, 2021
4. FoxBusiness.com, June 23, 2021
5. The Wall Street Journal, June 16, 2021
6. FactSet.com, June 4, 2021
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.