Weekly Market Update 07/06/2021Submitted by Ralicki Wealth Management & Trust Services on July 6th, 2021
The U.S. economy has begun the second half of 2021 in generally good shape, with GDP growth in the just-ended quarter likely having equaled or surpassed the 6.4% gain tallied in the initial period. Helping the advance have been decent performances in housing (despite surging construction costs and home prices), modest gains in durable goods orders, declines in jobless filings, and rising levels of consumer confidence.
The good news may continue into the current half, with the economy getting a possible early lift if the bipartisan infrastructure agreement reached last month goes on to passage more or less as announced. The fragile accord, which calls for $1.2 trillion in spending over eight years, still needs Congressional approval. Key sectors, led by construction, would benefit, with increases also seen in productivity and living standards. Couple this potential economic boost with likely gains in consumer and business activity and GDP could rise by 7%, or so, in 2021.
Still, there are concerns, and these are focused on the risk of higher inflation, with recent weeks seeing a rise in prices for oil and gas, lumber, and other construction materials. In fact, a key inflation gauge used by Federal Reserve policymakers—the personal consumption expenditures price index—recently rose at its fastest rate in nearly three decades. For now, the Fed suggests the inflation spike (which may soon include food, as the drought worsens in the western states) is temporary and will fade as the expansion moves onto a slower track. We shall see.
To this point, investors are willing to go along with the Fed, which explains the market’s comeback after a mid-June selloff. Indeed, the latest rise in stock prices, which has been helped as well by optimism on infrastructure spending, has pushed the S&P 500 Index and the NASDAQ to record highs.
The next few months will be critical, with multiple issuances on job growth, wages, and producer and consumer prices likely to provide long-term answers on inflation. The stock market, which has shown commendable resilience, could face additional tests along the way. So far, it has climbed that wall of worries, following a market adage.
Conclusion: Even with the risks, we think a healthy weighting in stocks is appropriate at this time.