June brought more equity growth: The S&P 500 finished the month with five consecutive quarters of growth and a return of 14.4% for the year. With rising optimism about the recovery and a broader reopening of local and state economies, there has been a rapid upswing in activities like shopping, travel, and everything else we missed in the pandemic.
In this note, we’ll cover some of those key trends and take a look at where the economy and markets might go from here as we head into the second half of 2021.
All in all, much of the American economy seems to be moving back to normalcy. One measure, the “normalcy index” created by The Economist, which tracks data points such as public transportation, road traffic, sports attendance, and numerous others, puts the U.S. at 73 (100 being the pre-pandemic level). At its lowest point last April, the index fell to just above 30 in the U.S. In other words, we seem to have rebounded quite strongly.
Second quarter earnings for large U.S. companies are expected to be strong. Of the S&P 500 firms that have issued guidance on earnings-per-share, 66% have positive expectations (by way of comparison, the five-year average is 37%). Similarly, 80% have shared positive revenue guidance versus a 52% five-year average.
Employment has also bounced back. The economy added 850,000 jobs in June, with the unemployment rate pretty steady at 5.9%. Jobs growth is of course positive news, though as the Bureau of Labor Statistics points out the overall number of unemployed people is relatively unchanged.
That said, wages had a third straight month of gains in June. Year-over-year, wages have risen 3.6% as of June. However, consumer prices have also shot up, with the consumer price index rising 3.9% in the year through June. This could create a tricky situation for consumers, especially those on the lower-income side of the spectrum—especially as rising costs have impacted core spending areas.
One notable example is the price of gasoline. On average, gas prices are up 40% for the year and have reached their highest level in seven years. AAA expects prices to rise another 10 to 20 cents through August. With some expectations that the oil market could be volatile—OPEC recently failed to come to an agreement about output—we could see continued pressure on Americans at the pump.
As we’ve discussed before, some of these effects are likely temporary and related to the post-pandemic rebound.
In other words, the key question is what comes next. The Federal Reserve expects economic growth to hit 7% in 2021—the most rapid calendar-year expansion since 1984. Growth is likely to moderate next year, but we could see continued strength in the rebound as a whole. The International Monetary Fund has also predicted 7% growth this year, followed by 4.9% growth in 2022. Both numbers are a significant jump from previous predictions made in April and assume that both the American Jobs Plan and American Families Plan are passed.
Many eyes are focused on inflation: The Fed shared two unexpected rate hike projections for 2023 and higher inflation projections for this year. There’s a degree of uncertainty about what to expect going forward, as the committee appears to be somewhat hawkish about the future. At the same time, Fed Chair Jerome Powell has indicated that there will be a high bar to reducing monetary stimulus.
What does all that mean for consumers? We could see a peak in consumer price inflation this year—the IMF puts this number at about 4%–before it falls again. The Fed’s shift in timeline on managing interest rate rises does indicate a willingness to respond to changes in real economic data, as opposed to expectations.
In any situation, we believe there will be a lot of attention within the Fed on finding a way to taper support without triggering a “tantrum”in markets. With the experience of the post-crisis period, we could see a lot of gentle and supportive communication leading up to policy changes, though the speed of those changes may be different than what we expect today. It all depends, of course, on the path of the recovery.
For investors, this means we could see choppy or even emotional markets as economic indicators are assessed and policy changes digested. Overall, however, the recovery appears to be taking hold.
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