Market Monitor: August 2021 Update
Headlines and Highlights
- Fed delivers reassuring message that it remains accommodative: Federal Reserve Chair Jerome Powell said in a speech at the central bank’s annual symposium that the Fed might begin reducing its $120 billion-a-month bond-buying program by the end of the year. He made clear, however, that the Fed is in no hurry to raise interest rates while the labor market and economy are still in recovery mode. Powell’s gradual approach encouraged investors that the plug will not be pulled suddenly or soon on the Fed’s emergency monetary support.
- Economy takes further strides despite Delta’s spread: August data showed the U.S. economy making solid if unspectacular progress in the face of a rising threat from the Delta strain of COVID-19 that has eroded consumer sentiment. Manufacturing expanded at a faster-than-expected pace and initial claims for unemployment insurance fell to a pandemic-era low, the latest evidence that the jobs market is slowly healing.
- S&P 500 rises for seventh straight month: U.S. stocks maintained their steady upward path despite a rise in COVID-19 cases that prompted uncertainty about future economic activity. Large-cap stocks as proxied by the Standard & Poor’s 500 have increased in every month since January, the longest streak of gains since a 10-month run ending in January 2018. Small caps bounced back from a difficult July and international stocks logged a positive month despite uneven recoveries in Europe and Japan.
Select Market Returns
Sources: Morningstar, Altair Advisers
- The economic recovery remains on course despite the latest challenge posed by the Delta variant. Strong fundamentals, robust corporate earnings and household balance sheets leave the economy well-positioned to ride out the latest wave of COVID-19 cases. Amid waning sentiment, consumer demand for goods and services remains solid and that should help fuel continued, modest growth as supply chains normalize.
- Inflation, while moderating in the most recent Consumer Price Index report, is still at a historically high level and likely to remain so for the rest of 2021. We expect price growth to come down in 2022 as supply constraints ease, health concerns are addressed and the labor supply returns toward normal.
- The Federal Reserve showed in its recent statement about preparing to slow the pace of asset purchases that it has learned its lesson from 2013, when markets fell following its abrupt announcement about a similar drawdown. Chairman Powell’s assurance that rates will not be raised, publicly telegraphing a gentle path toward tightening, bolsters our confidence that the gradual pullback of stimulus will not cause lasting turmoil.
- Markets face the potential for bouts of volatility this fall with legislative battles over spending and tax hikes looming in Washington and progress toward a fully recovered economy challenged by the acceleration in coronavirus cases. However, given the economy’s resilience and the Fed’s renewed commitment to a highly accommodative monetary policy, we see a likelihood of additional gains for markets by year-end.
- China’s economic slump is emerging as an area to watch given the consequences for the global economy if it persists. Fallout from the country’s worst coronavirus outbreak in a year coupled with Beijing’s proactive approach on lockdowns has caused economic activity to contract, a slowdown exacerbated by the government’s regulatory crackdown on businesses. For now, the strength of the world’s second-largest economy continues to help power the global recovery from the pandemic and act as a linchpin for international markets.
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