August brought new highs to U.S. equity indexes, with the S&P 500 enjoying its seventh straight month of positive performance despite concerns about inflation, labor markets, and the pandemic.

Large companies performed very well in the second quarter: for the 98% of S&P 500 companies that have already reported second quarter earnings, earnings growth was a blinding 89%, far outstripping the expected earnings growth of 63%.

There are a few areas that could weigh on markets going forward, namely the pace of the recovery and the impact of Federal Reserve policy, but through August at least, markets have pushed through such concerns with fairly strong momentum.


The Jobs Recovery—Where to From Here?

Employment was expected to grow by 725,000 jobs in August. In fact, the U.S. economy added just 235,000 jobs in August, sharply below expectations and the 1.1 million jobs created in July.

Economists have identified a number of potential reasons for the dip, including the spread of the highly contagious Delta variant of COVID-19,enhanced unemployment benefits, childcare issues, and others. That said, the unemployment rate fell slightly, to 5.2%, and wages rose 0.6% from July for an annual increase of 4.3% through August. Part of this was driven by job losses in low-wage sectors such as leisure and hospitality, while a lack of available workers has also helped boost wages.

One logical question here is, of course, what’s the goal?

A common turn of phrase in market and economic news these days is that the Federal Reserve is looking for “full” or “maximum” employment. This is essentially an unemployment rate that’s consistent with a steady inflation rate (in other words, not a literal maximum).

A simple way to think about this is that full employment is achieved when the economy is running “hot” enough that wages and prices are rising steadily— wages because businesses need workers and prices because workers have money to spend. Hotter than this and inflation gets too high, cooler than this and we haven’t achieved employment potential.

In practice, it’s difficult to define the point at which we’ve achieved full employment, especially in the wake of COVID-19, which upended the labormarket. The Fed has also updated its models of the relationship between employment and inflation after determining that it may have raised interest rates too early after the last recession.

Some Fed officials believe the U.S. economy may achieve full employment as early as next year, especially if workers return to jobs after the start of the academic year. That said, we may see longer term shifts in the characteristics of the labor market, which also impacts policy and of course economic growth.

How are Businesses Faring?

With all the economic data points to consider, the continued uncertainty around COVID-19 variants and global travel and recovery, it can be difficult to gauge where we are exactly. For investors, one interesting data point is the recovery of the corporate sector.

A Wall Street Journal analysis found that over 75% of the largest U.S. companies have reported higher revenue than before the pandemic—an indication that they may have already adapted and bounced back. Of course, this varies by sector, with areas such as consumer services, airlines, and of course tourism still feeling the impact of the pandemic. That said, about a third of companies in the S&P 500 have seen continued growth through the pandemic and recovery period.

While large-cap firms are certainly far from the only employers in the economy, the robust recovery here does provide some optimism for recovery in jobs. Interestingly, many large employers have moved to raise their minimum wages, with average pay for supermarket and restaurant workers reaching $15 per hour.

Of course, this has spurred some level of inflation concern. While there are policy complexities to consider, as noted above, Fed Chair Jerome Powell reiterated recently that the Fed “remains steadfast in our oft-expressed commitment to support the economy for as long as is needed to achieve a full recovery.”

The Bottom Line

Markets have performed very well through summer. As we head into the fall there are still risks on the horizon, but overall the economic picture is one of general recovery, with plenty of policy support. While the potential for volatility remains, the strong performance of large corporations seems to indicate a degree of robustness. The jobs situation is one that the Fed is certainly keeping an eye on, and which will continue to evolve with the end of enhanced unemployment and a return to the normal school year.

This communication is distributed for informational and educational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. The information herein has been derived from sources believed to be accurate, but no guarantee can be made as to its accuracy or completeness. All investments include the risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is no guarantee of future results. 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. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly.

All economic and performance data is historical and not indicative of future results. All opinions expressed herein are those of WealthSource® Partners, LLC and do not necessarily represent the opinions or views of WealthSource’s affiliates, are current only as of the date of this communication and are subject to change without notice. WealthSource does not have any obligation to provide revised opinions in the event of changed circumstances.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Nasdaq Composite is a market-capitalization- weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities. The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related securities, corporate securities, residential and commercial mortgage-backed securities, and asset-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally considered representative of the broad U.S. stock market. The MSCI All Country World Index (ACWI) is designed to represent the performance of large- and mid-cap stocks across 23 developed and 26 emerging markets and represents approximately 85% of the free float-adjusted market capitalization of each market. The MSCI Europe Index captures large- and mid-cap representation across 15 developed market countries in Europe and covers approximately 85% of the free float-adjusted market capitalization across the European developed market equity universe. The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 emerging market countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Chris Shea

Chief Investment Officer

As Chief Investment Officer, Chris finds and vets state-of-the-art investment choices for WealthSource clients — and explains important but complex investment concepts.

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