July brought new equity market highs, despite concerns about the rapid spread of the Delta variant of COVID-19. With the economy and inflation showing strength in the past quarter, many are beginning to wonder whether the trends we’re seeing are a short-term blip on the radar or part of a larger shift.

In this newsletter, we’ll look at the current state of the economy, the way that housing illustrates some of the complexities of the recovery, and what we’re looking at in terms of policy as we head towards the fourth quarter.

The US Economy

In just about 15 months, the U.S. economy went from the first lockdowns back to reaching a pre-pandemic level of economic activity.

The rebound is likely to slow through the rest of the year as pent-up demand for goods and services eases a bit. Moody’s, the ratings agency, anticipates economic growth of 6.5% for 2021 and 4.5% in 2022.

Consumer demand has been an especially strong driver of the economic turnaround: in the second quarter, total personal consumption spending rose at an 11.8% annualized rate, while the demand for services grew 12%. Moody’s expects to see this trend continue as supply bottlenecks ease and the economy continues to reopen.

Consumer confidence rose to an unexpectedly high level in June, and the number of workers voluntarily quitting their jobs has exceeded pre-pandemic levels and reached a record high. This could be partially explained by awareness that jobs are plentiful, meaning that despite a still-high unemployment rate workers are recognizing that they have more options.

For some observers, the key risk to continued strength in economic growth is the Delta variant of COVID-19. Even if demand remains strong, Delta could worsen supply chain bottlenecks and make it difficult for workers to move towards open jobs, which could both hamper the recovery.

Microcosm of the Recovery: Housing

Housing prices leapt this year—to the point that home price growth of 17% in one year set an all-time record. With a wave of buyers on the market, home inventory fell 53% between April of 2020 and April of 2021, and prices reflected that decline.

If you were looking for a new home during this period, you would be forgiven for wondering if you need to hurry up and pay any price to get into the market. But the tide already appears to be turning: available homes on realtor.com rose by 3% in May and another 9% in June, while the pace of home sales sharply slowed.

Of course, that’s not the end of the story. The lapse of two important mortgage assistance programs this year may drive inventories back up, but that doesn’t mean prices will fall. Inventories may remain low for some time, and demographic trends (namely, Millennials buying houses) could support a higher level of long-term demand.

In other words, just as in many other areas of the economy, there are short-term quirks and long-term trends. Picking apart the two isn’t always so simple. In the case of housing, we’ve seen some dramatic pandemic-related market pressures—but they exist in the context of a bigger picture.

What Comes Next?

This balance between pandemic effects and longer-term trends is, in our view, likely to play out across the economy.

The Federal Reserve recently noted that it would continue to provide supportive policy until unemployment falls to levels consistent with what economists call “full employment” and until inflation moderately exceeds 2% “for some time.” In other words, from the perspective of the Fed there’s still a potentially long on-ramp to a return to normalcy.

The high inflation numbers we’ve seen recently are, according to the Fed, transitory, meaning they’re expected to cool over the coming months. We’ve talked about inflation before, but despite the Fed’s statement about inflation being temporary, some polls are showing that Americans are increasingly concerned about rising costs.

Should they be? Some indicators (for example, the wholesale prices for used vehicles) show signs of easing price pressures. As the economy recovers, we hope to see more resolution of supply and potentially a petering-out of the pent- up demand for goods and services, which could further ease price pressures.

Of course, another important aspect of this is fiscal policy: with a $550 billion infrastructure bill heading towards a Senate vote (as of this writing), we could see additional stimulus for the economy. It is certainly too early to tell how this plays out, but it is another variable to consider.

The Bottom Line

All that said, what happens next depends on a mix of policy, wages, and of course the impact of Delta and any other variants that arise. It does appear that the Fed is looking for slightly accelerated inflation before tapping the brakes, and we expect a lot of early communication about what policy decisions are coming. While consumer confidence and jobs appear to be returning, we’re also closely monitoring the Delta variant situation in the event that it disrupts expectations for jobs growth and a return to pre-pandemic normalcy.

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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