Updated July 23, 2021
Our investment team remains committed to sharing regular updates and market insights to keep you informed. Please look for our next update on August 5.
Equity Markets See Volatility, but No Direction
Equity markets are roughly where they were two weeks ago. That does not mean things have been boring. After selling off last Friday, markets were hammered on Monday based on fears surrounding the current spike in COVID-19 Delta variant cases. The Dow Jones Industrial Average fell more than 700 points Monday, the worst day for the Dow since last October. However, just as we’ve seen with other recent sharp drops, markets quickly rebounded. The Dow was up 550 points Tuesday and gained an additional 286 points Wednesday
The Dow is now up more than 13.5 percent for the year and the S&P 500 is up more than 16 percent. The tech-heavy NASDAQ, which trailed other indices for most of the year, is now nearly 14 percent higher year-to-date. We believe this environment remains conducive to higher stock prices as we move toward the end of the year and into next. However, uncertainty regarding inflation, interest rates and COVID variants will likely result in additional periods of volatility.
Inflation Data Remains Elevated
We continue to see strong demand and tight supplies across the economy. Whether for labor, housing, vehicles or microchips, shortages are naturally causing prices to increase. After being dormant for years, inflation rates have increased significantly these last few months. Last week’s release of inflation data showed Core Consumer Price Index (CPI) at 4.5 percent and Core Producer Price Index (PPI) at 5.6 percent.
The Federal Reserve has indicated that it expects some higher inflation in the near-term, but believes it is transient due to reopening and stimulus measures. We do not believe we will approach 1970s/early 1980s inflation levels. However, the period of higher inflation may go longer and run a bit higher than the market is currently predicting.
Second-quarter Gross Domestic Product (GDP) is set to be released next week and is expected to show a growth rate approaching 10 percent. Excluding last year’s third-quarter rebound from COVID-19 lockdowns, it is expected to be one of the strongest quarters in decades. While this will likely be the high point, we expect strong growth for the remainder of the year. An improving employment picture, strong consumer spending, continued stimulus measures and the rebuilding of inventories remain the driving factors behind the strong economic growth
Interest Rates Continue Lower Trend
The decrease in intermediate and long-term interest rates has been a surprising development these last few months. The benchmark 10-year U.S. Treasury fell below 1.2 percent earlier this week before rebounding slightly. Given the surging economy and elevated inflation data, conventional wisdom would have predicted higher rates. However, foreign purchases, the Fed’s asset purchase program, and seasonal factors are likely the main culprits in driving rates lower. A positive aspect of this is lower mortgage rates. The average 30-year mortgage rate has fallen back to around 3 percent, which helps fuel the already strong housing market.
What Should I Be Doing With My Investments?
We encourage you to pay attention to the latest developments, but not to lose sight of your long-term investment strategy. Reach out to our investment team to discuss your options and reaffirm your timeline and goals. Call our investment team at (518) 415-4401.