Sightline Weekly Market Update: Recovery Data and Easing Inflation Fears Support Market Highs
The S&P and Nasdaq hit new highs with the most robust weekly gains since April as concerns over a Federal Reserve policy adjustment abated. Economic data reflecting a solid recovery and accommodative monetary policies continued to support higher equity prices. Fears of inflation eased as signs of supply chain disruptions causing upward pressure on prices relaxed with commodity prices moderating particularly sharp declines in lumber prices. The exception in the commodity space was oil hitting the highest level since October 2018, finishing the week at $73.98, a 53.5% increase year to date.
The TSX gained 0.99% on the week bringing the year-to-date return to a very respectable 15.41%. U.S. equity indices also showed strong performance on the week, with the S&P 500 hitting a record high, with a gain on the week of 2.74% and a year-to-date return of 13.97% in domestic terms. The Dow jumped 3.44% on the week, year-to-date up 12.51%. The S&P Mid-Cap 400 advanced 4.39% with a year-to-date return of 18.20%, and the Russell 2000 increased 4.32% on the week, bringing the year-to-date total to 18.21%. European equity indices were generally up, increasing over 1% on the week.
On Wednesday, the research firm HIS Markit released their June preliminary survey results for U.S. manufacturers and service-oriented companies. The manufacturing index rose to the highest level on record to 62.6, whereas the service-oriented index fell to 64.8 from 70.4 in May. (A reading above 50 indicates expansion). As mentioned in past commentaries, companies continue to deal with supply chain bottlenecks and labor shortages as demand is outstripping production. The supply-demand imbalance which creates pricing pressures on many goods and services is thought to be temporary as the economy fully re-opens later this year and next.1 The U.S. Census Bureau Wednesday reported new home sales falling 5.9% from the previous month to the lowest level in a year. The same report also stated, “U.S. Census Bureau noted that the change in new home sales between March and May could be 18.6% larger or smaller than what it is currently reporting, a wide confidence interval.”2 On Thursday, the U.S. Census Bureau reported durable good orders (orders for long-lasting goods such as autos and airplanes) rebounded in May 2.3% compared to the April revised reading down 0.8%. Unfilled orders in May for manufactured goods rose 0.8% or $9.5 billion to $1.209.3 billion. The latest increase is the fourth consecutive monthly increase.3
Initial jobless claims decreased less than previously estimated for the week, falling 7,000 to 411,000 compared to the previous week’s revised level of 418,000, which is 6,000 higher than initially reported. Continuing claims for all benefit programs increased by 3,756 to 14,845,450 compared to 31,337,556 one year ago. Continuing claims levels for all programs are anticipated to fall as several states force workers back into the workforce. Twenty-six states have pledged to end participation in Federal unemployment programs in advance of the September 6 deadline for the program. The $300 per week additional Federal benefit combined with state benefits makes it difficult for small businesses to find workers when, under the current benefit programs, many workers can make more at home.4 Additionally, childcare difficulties and fear of a Covid variant have some workers not wanting to return and creating a surge in retirement.5 Reported on Friday, personal income decreased by 2%, reflecting a decrease in government benefits. Consumer spending remained flat however remains higher than pre-pandemic levels. The current growth in spending is enough to keep the economy moving ahead. The PCE index increased 3.9% in May over a year ago, reflecting an increase of 27.4% in energy prices and food up 0.4% over the same period.6
On Thursday, President Biden announced with great flourish at a White House reception, attended by several Democrats and Republicans who brokered the agreement, the much-awaited bipartisan infrastructure spending program. Within minutes of the press conference announcing the deal, the President all but torpedoed a quick passing when he tied the $973 billion infrastructure agreement to a broad anti-poverty and social plan. This led to speculation that the Democrats were not negotiating in good faith with the Republicans in reaching a bipartisan agreement knowing the social program package would be tied to the infrastructure agreement and would not pass without passing the social package. On Sunday, the President reversed his earlier comments that both bills were tied together stating, “The bottom line is this: I gave my word to support the Infrastructure Plan, and that’s what I intend to do. I intend to pursue the passage of that plan, which Democrats and Republicans agreed to on Thursday, with vigor.”7 While investor sentiment may not respond to the latest political discord, the animosity between the two parties continues to grow. It will create an uncertain environment that could spill over into the equity markets as investors lose confidence in leadership. Historically, when societies lose confidence in leadership, the equities market struggles with increasing volatility.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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