Continued Improvement Persists

Markets have continued to trend higher for the most part over the last month (although last week we saw some weakness). This is largely due to the economy showing signs of improving. However, some of the economic numbers have been a little disappointing. GDP for the second quarter came in at a solid 6.5%, but it was about two percent below expectations. As you know, we don’t over emphasize this number due to the reporting lag, but we have two reactions.

1.) GDP was held back by supply chain and employment issues. For example, the shortage of computer chips continues to have a significant effect on automobile production. Also, finding employees has been difficult in many areas of the service sector.

2) GDP should be a tailwind looking ahead as inventories are replenished. On the upside, consumption was hot for the quarter (+11.8%). This is a good sign since, as we’ve mentioned many times, the consumer is king. Corporate earnings have, broadly, been very good.

The outlook for inflation is still, as Oaktree Capital co-founder Howard Marks believes, “impossible to know.” Altogether, we see the economic numbers as not bad, but still “underwhelming.” Ultimately, this could boost the case for more dovish monetary policy.

Investors were wondering going into last week’s Fed Open Market Committee meeting if any hints regarding quantitative easing would be forthcoming. Chairman Powell acknowledged some progress has been made toward the committee’s goals; therefore it can be argued that the tapering clock has started. The jobs picture is holding sway with the committee. Powell confirmed that stance in his regards after the meeting, saying that there is “some ground to cover on the labor market side” before the economy approaches its preferred recovery metrics. “I think we’re some way from having had substantial further progress toward the maximum employment goal. I would like to see some strong job numbers,” said Powell.

The Fed’s next meeting is its annual economic policy symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming August 26-28. We may learn more about the timeline for tapering monetary stimulus after that meeting. So far, the market has not been too surprised or spooked by the Fed’s guidance. If, as expected, it announces a tapering of bond buying for later this year at one of its next two meetings and an end to the stimulus by the middle of 2022, we don’t believe it will be a significant factor in equity prices. Of course, if the Fed falls behind the 8-ball on inflation and must rush its plan, US stock are very likely to respond to the downside.

We encourage clients to stay the course. We are cautiously optimistic moving forward and we expect further gains by year end.