Stocks advanced this week, as the S&P 500 Index and Dow Jones Industrial Average both reached new record highs. The combination of an improving labor market, continued corporate earnings strength, and a downturn in inflation fueled market returns. However, delta variant concerns in several states – as well as in Japan, China, Germany, and Australia – are tempering some enthusiasm for the economy, as reflected by the sharply lower University of Michigan consumer sentiment figure for August, which was released on Friday.
For the week, the S&P 500 Index finished up 0.7%, while the Dow Jones Industrial Average rose 0.9%. Year to date, the S&P is up 19.0%; the Dow has gained 16.0%. Weekly first-time unemployment claims fell for the third consecutive week to 375,000, while continuing claims continued their downward trend to 2.87 million, their lowest level since the pandemic began.
Data from the July U.S. employment report showed an increase of 943,000 jobs and a decline in the unemployment rate to 5.4%. The labor participation rate ticked up to 61.7%, as more people reentered the workforce; however, participation is still down sizably from pre-pandemic levels. There are more than 10 million job openings in the U.S. economy, even as 9.5 million Americans are unemployed. As extended unemployment benefits expire next month, these data points will receive even more scrutiny to better assess the near-term future of the labor market.
Inflation moderated in July; total inflation and core (excluding food and energy) figures both showed a slower rate of growth month-to-month. Categories comprising the majority of the surge in inflation this year showed some signs of reversing: rental car and airfare prices fell slightly, and used car prices grew at only a 0.2% rate (down from an astounding 10.5% increase from May to June).
Although hurdles remain before additional Congressional spending is enacted into law, we expect some measure of additional fiscal support in 2021. These prospects for additional spending, coupled with a Federal Reserve that is still providing the economy with accommodative monetary policy, still leads us to favor stocks over bonds on a relative basis. However, we continue to analyze inflation, corporate earnings, employment data, and Fed policy statements, amongst other factors as we devise portfolios for long-term investing.
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