U.S. stocks cruised higher again this week, propelled by low interest rates, government spending, strong corporate earnings, and the economic reopening brought on by the vaccination effort. The S&P 500 Index and Dow Jones Industrial Average both reached new record highs during Friday’s trading. Positive employment and economic data released this week supported our view that the U.S. economy is poised for increased growth in the second half of 2021.
For the week, the S&P 500 Index finished up 1.4%, while the Dow Jones Industrial Average rose 1.2%. Year to date, the S&P is up 11.4%; the Dow has gained 11.7%. First-time unemployment claims dropped more than expected to a pandemic low of 576,000, while continuing claims remained flat at 3.7 million. U.S. retail sales were up 9.8% in March, significantly outpacing expectations. Government stimulus payments, the expanded reopening of many state economies, and an uptick in employment all contributed to the rise in consumer purchases.
U.S. inflation (as measured by consumer prices) increased in March, following the upward trend in producer prices reported last week. Higher gasoline prices resulting from increasing demand were a strong contributing factor to the Consumer Price Index (CPI) rise. We continue to believe that reported inflation could be higher in the next few months as 2021 data is compared to last year’s results from the nadir of the pandemic. However, we do not believe that will morph into sustained, elevated inflation in the near future. Once the U.S. recovers GDP growth lost during the pandemic and achieves full employment – potentially as early as mid to late 2022 – conditions could be right for higher inflation. But Federal Reserve Chairman Jerome Powell reiterated that he is not yet worried about inflation, and that the Fed remains unlikely to raise short-term rates in the near term.
The combination of solid economic news, rebounding corporate earnings, and increased vaccination rates provide a supportive environment for stocks. In our view, this backdrop will only improve through 2021 and into 2022. We believe stocks will continue to look favorable versus bonds on a relative basis. Even though their risk characteristics and return potential differ in the current environment, both assets still play important roles in a diversified portfolio.
Tax planning is a widely discussed topic during this time of year and we encourage you to reach out to your Wealth Advisor to discuss tax strategies for 2021. Please check out our 2021 tax guide to review useful information on tax rates, deductions, credits and deadlines. We also encourage you to review our article on understanding cybersecurity threats during tax season. As always, please contact us with any questions. We are here for you every step of the way.