After moving higher in early-week trading, U.S. stock indices reversed course and finished down slightly for the week. The tug-of-war between strong economic data and higher reported inflation continues to obscure near-term prospects for financial assets. Federal Reserve Chairman Jerome Powell, in testimony before Congress this week, reiterated the Fed’s commitment to providing monetary stimulus while acknowledging the possibility inflation could become more persistent than originally expected.
For the week, the S&P 500 Index finished down 1.0%, while the Dow Jones Industrial Average declined 0.5%. Year to date, the S&P is up 15.2%; the Dow has gained 13.3%. Weekly first-time unemployment claims fell to 360,000, a new pandemic-low level, while continuing claims declined to 3.24 million. U.S. retail sales rose more than expected in June, as consumer spending was propelled further by large amounts of accumulated savings and increasing demand. The future outlook for consumer activity appears a bit more murky; the University of Michigan’s U.S. consumer sentiment monthly survey results declined to the lowest level since February.
The June U.S. Consumer Price Index (CPI) report, a popular measure of inflation, indicated a rise of 0.9% since May and 5.4% from last June’s figure. While these inflation levels are elevated, some perspective is warranted. The bulk of the increase is still driven by a small batch of sectors – airfare, hotels, rental cars, new and used vehicle purchases – most affected by the pandemic. In fact, used vehicle prices rose 10.5% from May to June, accounting for nearly one-third of the monthly CPI increase! That indicates a severe supply and demand imbalance that is being felt across many other industries. It is unlikely that prices will continue increasing once equilibrium is achieved in those markets, which is why we are still taking a wait-and-see approach to inflation reports. The pricing effects of the unprecedented shutdown and reopening of our economy still need time to resolve, making it important to not react rashly to any particular data release.
As always, it is vital to prepare for any short-term cash needs while maintaining perspective on your long-term goals and objectives. Our diversified approach to asset allocation helps to mitigate the inherent risks of investing while seeking to maximize your chances to achieve desired results. Please contact us with any questions; we are here for you every step of the way.