Market Monitor: July Mid-Month Update
Headlines and Highlights
- Consumer prices trending higher with recovery: U.S. consumer prices increased last month by the most since 2008, a reflection of supply constraints and the booming economic recovery. Airfares and hotel costs jumped amid a surge in travel, joining used car and truck prices among key inflationary categories. The latest data shows that just a few segments linked closely to the economic reopening are driving the inflation readings, supporting expectations that inflation will likely moderate later this year.
- COVID-19 case counts rising again in some states, countries: The rapid spread of the Delta coronavirus variant coupled with low vaccination rates in certain regions is tempering optimism about the U.S. and world economies. U.S. coronavirus cases have doubled in three weeks, affecting mostly unvaccinated individuals under age 50, and infection rates in Europe have climbed to their highest level in months. While virus cases remain far below peak levels, Treasury Secretary Janet Yellen said variants could slow the global economic recovery.
- Stocks start second half mostly higher: Major U.S. stock indexes pushed to a series of new highs, adding to substantial gains for the year. The Standard & Poor’s 500 closed at a record high 10 times in 12 trading days, a feat last achieved in 1964, and overtook small caps with a 2021 gain of 17.4% through two weeks of July. U.S. REITs extended their lead as the year’s top-performing asset class, boosted by the reopening; the Vanguard REIT ETF has returned 25.4%.
Chart of Interest
Fueled By a Few: Sharp price increases in a handful of categories, including used vehicle sales, air travel and lodging, have lifted inflation to a 13-year high.
Sources: St. Louis Federal Reserve, Altair Advisers
- Inflation reached a 13-year high for a second straight month and is likely to remain above average for the rest of the year. But the components that surged the most are closely tied to the economy’s reopening, suggesting that price growth will decelerate over the coming months as labor shortages dimmish and global supply chains catch up post-pandemic.
- The 10-year U.S. Treasury yield has fallen to 1.3% from 1.7% in March amid concerns about whether the economic recovery could be threatened by inflation or a resurgence of COVID-19. We expect it to drift higher but remain range-bound through the end of the year as the economy regains full strength and do not anticipate a meaningful breakout higher or lower.
- Markets remain calm and mostly have been so for months despite the climb in prices and the new threat posed by the Delta variant, reflecting continued optimism about the economy. The CBOE Volatility Index (VIX), which represents the U.S. market’s expectations for volatility over the coming 30 days, currently hovers around 17, well below the historical average of about 20.
- Corporate earnings for the second quarter are forecast by FactSet to have grown by 64% year-over-year, the fastest rate since the fourth quarter of 2009, due to the strong economy and comparison to the lockdowns period of a year ago. Cyclical sectors that have thrived during the recovery – energy, industrials, consumer discretionary, financials and materials – are behind the profits boom.
- The European economy is rebounding faster than previously expected thanks to the gradual lifting of lockdown measures and progress in vaccinations, according to the European Union, which upgraded its growth estimates for 2021 and 2022. However, it remains threatened by a rise in the Delta variant that is particularly rampant in Spain, Portugal and the United Kingdom and prompted new shutdowns in the Netherlands and elsewhere.
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