Stocks retreated this week, driven lower by concerns that economic growth may be plateauing while inflation remains elevated. Although the current state of the economy is strong, the telegraphed tapering of bond purchases by the Federal Reserve (and the implied raising of short-term interest rates that would follow) has also caused recent volatility. In addition, the potential breakdown in negotiations in both houses of Congress surrounding both a debt limit increase and a sharp increase in fiscal spending has injected additional uncertainty into markets.
For the week, the S&P 500 Index finished down 2.2%, while the Dow Jones Industrial Average fell 1.4%. Year to date, the S&P is up 16.0%; the Dow has gained 12.2%. The labor market continued its uneven recovery, as first-time unemployment claims rose to 362,000 while continuing claims fell slightly to 2.8 million. First-time claims reached their highest level in seven weeks, mainly due to a recent spike in applications for benefits from Michigan and California residents.
September has historically been a challenging month for stocks; this year was no exception, as the S&P 500 Index fell 4.8%. This year, in addition to the end-of-summer blues, COVID case levels and inflation added to negative sentiment. COVID delta variant case numbers remained elevated during the month (although indications are that numbers may have peaked), potentially causing restrictive measures to return in some areas of the country. The latest development on the inflation front is the ratcheting upwards of energy prices, due to a combination of increasing demand and reduced supply. Oil prices have risen dramatically from last year’s lows, translating into higher prices for gasoline, home heating oil, and other crude oil distillates. European nations have been particularly affected by these recent trends.
However, there are still many positives about the current economic environment. Even though the rate of GDP growth appears to be slowing, it remains at a quite high level compared to recent years. Corporate fiscal health is strong, evidenced by solid earnings; American consumer spending continues to trend higher. The economy is poised to emerge from the shadow of pandemic governmental monetary and fiscal support in better condition than anyone expected in the summer of 2020. Even in the current volatile environment, we believe that stocks will outperform bonds over the next 6-18 months.
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