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June Economic Update

Market Summary

Stocks were range-bound throughout the month of May as investors digested more solid corporate earnings reports, accelerating inflation, and mixed economic signals. The Dow Jones rose 1.93% while the S&P 500 Index posted a modest gain of 0.55%. The technology-oriented Nasdaq pulled back -1.53% with high-valuation companies experiencing some pressure. (1)

Inflation

With 95% of S&P 500 companies reporting their earnings, 86% reported positive surprises. The estimated earnings growth rate was 51.9%, the highest rate since the first quarter of 2010. (2)


However, the emerging inflation story considerably dampened investor optimism and weighed on the stock market. The latest Consumer Price Index report was particularly unsettling to investors, as consumer prices rose 0.8% in April 2021 and jumped by 4.2% year-over-year. A 6.2% year-over-year spike in the Producer Price Index followed, representing the most significant jump since 2010. Strong consumer demand, supply chain kinks, and comparisons to the previous year's pandemic-induced price declines contributed to the spike in prices. (3)


Technology and other high-growth stocks experienced increased volatility as investors seemingly hedged risk with concerns that higher inflation may lead to higher interest rates, and that combination could reduce the value of future earnings for growth stocks. (3)


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.


Looking Forward...

The inflation worries that gave pause to the stock market last month are likely to persist as investors try to gauge whether inflationary pressures are truly transitory, as the Fed believes, or if they will become a more permanent feature of the economic landscape. (5)