Weekly Stock Market Update 06/21/2021
Inflation is heating up, with the Consumer and Producer Price Indexes surging by 0.6% and 0.8%, respectively, in May. Worse still, prices were up 5.0% and 6.6% in the latest 12 months, the former of which was the biggest uptick since August 2008, when the U.S. economy was in free fall. In all, inflation has been trending higher since January. The principal contributors to these firming prices have been gasoline, airline tickets, hotels, and used cars, with such vehicles’ demand and prices pulled up in part by the shortages of computer chips that have restricted production of new vehicles.
Are these pricing pressures transitory or something more persistent? That’s uncertain at this point, although given Wall Street’s continuing resilience and the recent decline in Treasury yields, investors would seem to be in agreement with the Fed in sensing that we are either at or near a peak in inflation. We think the next few months will be pivotal as new economic and inflation reports are issued. Should the lead bank be proven correct and the recent upward spike in inflation soon tapers off, the bull market likely would continue. If a more sustained rise in inflation ensues, stocks may come under pressure.
Meanwhile, the economy is pressing ahead, despite scattered shortages, with recent data showing gains in exports (led by civilian aircraft and industrial materials), a decline in weekly jobless filings to another pandemic low, a rebound in consumer sentiment, and rising industrial production. Such strength should help produce a solid rate of GDP growth this quarter.
The second-half business prospect seems more ill-defined, owing to a less certain inflation outlook. For now, assuming prices trend just modestly higher and the Fed keeps interest rates steady, GDP growth could hold close to the first quarter’s 6.4%.
As noted, the stock market continues to give a good account of itself, with the S&P 500 Index hitting further all-time highs. As with the economy, Wall Street’s second-half outcome will depend heavily on inflation and the Fed’s reaction to these price trends.
Conclusion: For now, the economic and profit fundamentals appear strong enough for most investor to stay fairly well committed to stocks.