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July Economic Update

Market Summary

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)

Economic News

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)