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)


Late last year, the rise in the stock market was largely and repeatedly attributed to a rise in future inflation expectations. While it is true that stocks often rise with inflation, there are limits to this correlation. If inflation becomes too high, it can hurt the consumer who is less willing to spend into the economy. The balance between too much inflation versus not enough inflation is often referred to as a “Goldilocks” predicament. Analysts and the Federal Reserve must carefully balance inflationary forces to prevent a drop in consumer confidence, as well as to preserve the strength of the U.S. dollar.


In other recent news, several economic reports indicated some companies have raised wages significantly to attract workers. This, too, has raised concerns that higher wages may spark sustained inflationary pressures as such increased costs typically are passed on to the consumer.


As our nation re-opens and we start to sense a renewed taste of normalcy, there are many economic factors that we will continue to monitor as we move into the summer months. At the moment we remain cautiously optimistic that the stock market will find an equilibrium to inflationary pressures, and the re-opening post-COVID will spur the right amount of economic growth to offset these concerns.


 

Monthly Financial Tip:

If you think your homeowners insurance might be too high, consider raising your deductible or receiving quotes from other insurance companies to ensure you are not overpaying.

 

Citations:

1. The Wall Street Journal, May 31, 2021

2 FactSet.com, May 21. 2021

3. The Wall Street Journal, May 13, 2021

4. FederalReserve.gov, May 19, 2021

5. CNBC.com, April 28, 2021

Disclaimers:

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.


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