Stocks cruised higher this week, recovering all ground lost last week – and then some – as the S&P 500 Index and NASDAQ Composite Index both posted fresh record highs. Federal Reserve Chairman Jerome Powell’s comments to Congress on inflation and employment seemed to soothe investors, as did the additional time to process the meaning of last week’s Federal Reserve commentary signaling future tapering of asset purchases and interest rate hikes. A tentative agreement between Congress and the Biden Administration on an infrastructure spending bill served as an additional catalyst for stock prices, although the road to that bill’s enactment into law remains lined with obstacles.
For the week, the S&P 500 Index finished up 2.7%, while the Dow Jones Industrial Average advanced 3.4%. Year to date, the S&P is up 14.0%; the Dow has gained 12.5%. Unemployment figures were generally positive, as weekly first-time claims decreased slightly to 411,000 while continuing claims fell to 3.4 million. Orders for durable goods (those expected to last three years or more) increased 2.3% in May, a positive sign for continued economic growth. However, supply chain disruptions persist in many industries – holding back the possibility for even better results. As an example, operations at the world’s fourth largest container port in Shenzhen, China continue to be dogged by the effects of a COVID-19 outbreak in late May. More than 90% of the world’s electronics are exported from this location, which means the delays and backlog have the potential to affect product availability for the holiday season!
The imbalances in supply and demand remain prevalent across the globe, adding some clouds to the future economic outlook. Are we still in an environment of fast economic growth and easy monetary policy, or is a shift toward slowing growth and slightly higher interest rates underway? Will small-cap, value, and cyclical stocks continue their leadership, or will the technology and growth stocks that flourished during the pandemic regain the mantle? Does the unprecedented move from complete economic shutdown to full reopening herald a new persistent inflation regime, or will the higher prices of 2021 prove transitory?
The good news is that while these questions cannot yet be answered with certitude by anyone, our core investing principles of asset allocation, global diversification, and cost sensitivity – paired with a cogent financial plan – assist in weathering volatility and uncertainty. We still believe that economic growth will remain strong for the balance of 2021, that inflation will be transitory in nature, and that there remains some potential for the “reopening” trade (small-cap, cyclical, and value stocks) to continue outperforming. While there are bound to be unforeseen twists and turns in the road ahead, staying true to our core principles helps mitigate the inherent risks of investing.
As always, please contact us with any questions. We are here for you every step of the way.
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