June 2021 - Market Commentary
As the U.S. slowly transitions into a post-COVID world, the following are our latest thoughts on the economy and markets.
Vaccinations
As of May 28th, ~168M citizens in the U.S. have received at least one dose of the several vaccines available, which equates to just under 50% of the total population. According to Johns Hopkins, the seven-day average of daily U.S. COVID-19 cases is 23,407 which is down 53% from the start of the month, and 571 daily deaths, which is an 80% reduction from the peak trend in January of 2021. [i] A number of U.S. states have begun to ease or eliminate mask mandates all together and there is a sense that life is crawling toward normalcy.
Growth
For those avid readers of our monthly commentary, we hope not to sound like a broken record regarding U.S. fundamentals but data on growth and inflation continue to come in extremely robust. The latest report on manufacturing and service activity revealed continued strong growth with the “new orders” component in the mid-60’s, which implies a strong economic upcycle. Interestingly however, the readings compared to the prior month were slightly softer. We believe part of the slowing month over month trend results from continued disruptions across the supply-chain, particularly in electronics and semiconductors.
Inflation
The primary market narrative of 2021 has been accelerating inflation data, with raw material prices spiking double-digits since the beginning of the year. There are several dozen indicators for inflation, however one of the Federal Reserve’s favorite data-points, the PCE (Personal Consumption Expenditures) Deflator, rose 3.6% compared to the prior year in the month of May, the fastest pace since 2008. Additionally, consumer prices rose 0.70% relative to the prior month, the fastest month-over-month change since 2011. Unfortunately, the lack of fresh stimulus checks drove a 13% month-over-month decrease in incomes and spending increased just 0.5%. [ii] What does this all mean? The consumer is in an increasingly disadvantageous position with still high unemployment compared with pre COVID-19 levels, slowing government support, and higher prices for all goods.
Policy
How will the Federal Reserve respond to the recent trends in inflation? The Federal Reserve’s formal policy stance is that inflation trends are “transitory” and will subside as the year-over-year comparisons normalize in the next three months, and manufacturing capacity/logistic issues are worked through. Thus, the Fed Chairman is reluctant to begin a conversation on tightening policy. Other market participants believe the aforementioned issues, plus the amount of monetary stimulus injected into the economy since COVID-19, will create high and more permanent inflation.
Outlook
We think continued strong economic data and liquidity support from both the Federal Reserve and U.S. Government points towards higher equity markets. We believe there could be some pause or breath on the seemingly one-way upward trajectory the markets have experienced since March of 2020, especially as consumers will bear the brunt of higher prices which could impact spending trends (the largest component of GDP).
Despite ever-changing market data and narratives, we are laser-focused on diversification in our portfolio management and utilize equities to combat inflation and fixed-income instruments to hedge broader market risk. The only certainty in markets is uncertainty and it is our belief that focusing on an investor’s total portfolio return is the most effective approach to achieving their long-term goals.
As always, if you have any questions or would like to discuss your accounts or financial situation further, please call your advisor directly or email us at clientservices@benchmarkfinancial.info. Please visit our website at www.benchmarkfinancial.info for more information on our planning services.