Inflation and the Delta variant of COVID-19 take the headline focus during the month of June. The Fed’s recognition of higher inflation and the potential for earlier rate increases ultimately helped to reassure investors. In addition, President Biden seemed to push for some bi-partisan cooperation on the infrastructure deal. Along with a stellar earnings season, was a good counterweight to inflation and pandemic fears, pushing markets broadly higher in July.
Let’s Look at some highlights
EYE ON WASHINGTON
It’s a busy summer for Washington, with two big items I expect we’ll be hearing more about soon. As mentioned above, there looks like there will be movement on the infrastructure deal. President Biden negotiated an outline of a bi-partisan infrastructure deal with 11 Senate Republicans. It’s important to note they negotiated a basic outline, and there is still no legislative proposal on paper. This bill will need a super-majority of 60 votes to pass. We’ve mentioned it before, but Democrats have a very slim majority in the Senate. They will need all Democrats to vote for it and need at least 10 Republicans to vote for it. Reaching across the aisle and negotiating an outline is a good first step for President Biden. Still, we will see if everyone stays in line once the legislation is actually written.
Democrats are also working on a spending bill that will lay out the budget for the government for next year. On this, Democrats only need a simple majority in the Senate, meaning they just have to get all 50 Democratic senators on board. That’s already turning out to be a challenge. Progressive Democrats want quite a big spending package while Moderate Democrats are balking at Progressives spending wants. Even after they agree to the overall size of the package, they then have to agree to how that money gets split up. Long story short, Democrats have a ways to go before they can introduce the package, but it is moving.
THE FED TALKED INFLATION
Following May’s jump, prices rose faster than expected again in June, with the consumer price index increasing 5.4% from last year. That is leading to concerns that interest rate hikes may be coming sooner than the markets currently expect.
Remember, the Fed has a dual mandate; keep inflation under control and push for maximum sustainable employment. Jerome Powell has been consistent in messaging that they believe these recent high inflation reports are transitory, caused by supply and demand imbalances stemming from the pandemic. That said, the Fed’s dot plot now points to an expectation that there could be two rate increases in 2023 and has indicated it will soon taper it’s bond-buying program.
- The S&P 500 is up 16.01% year to date (green line)
- The international index (MSCI EAFE TR) is up 6.45% year to date (blue line)
- The bond index (Barclays US Aggregate Bond Index) is down 0.56% year to date (orange line)
The Smart Investor
Stock valuations do look lofty, but we are optimistic that the improving global economics and company earnings can continue to push them further. Inflation worries and the delta variant surge may slow the recovery though. We continue to believe the best course of action is to remain broadly diversified, avoiding large bets in either equity or fixed-income assets. Of course, we are here for you if you have any questions or concerns.
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.