U.S. stocks finished lower this week, as the struggle between elevated inflation concerns and improving economic conditions continued. Although major stock indices moved higher on Thursday and Friday, mid-week losses proved too much to overcome. Higher April inflation data elevated concern that the Federal Reserve will be forced to taper asset purchases or raise short-term interest rates sooner than expected. The hacking of the Colonial Pipeline created a disturbance in the oil and gas market along the eastern U.S. – adding to supply and demand imbalances that have affected commodity markets this year. In contrast to last week’s disappointing April jobs report, unemployment claims fell this week in a sign that the labor market is slowly healing.
For the week, the S&P 500 Index finished down 1.39%, while the Dow Jones Industrial Average fell 1.14%. Year to date, the S&P is up 11.12%; the Dow has gained 12.34%. Weekly first-time unemployment claims fell more than expected to a fresh pandemic low of 473,000, and continuing claims decreased to 3.65 million. U.S. job openings stand at a record high of 8.1 million, as many employers are facing challenges in finding applicants for open positions, in part due to ongoing increased unemployment benefits. Retail sales remained unchanged in April, following a stimulus-induced increase in March.
Data released by the U.S. Bureau of Labor Statistics this week indicated that both year-over-year and month-over-month inflation rose more than consensus forecasts. The monthly increase is more noteworthy to us because it provides better insight into current conditions, whereas we believe the elevated annual change continues to result from comparisons to last year’s pandemic-affected levels. Two schools of thought surround inflation: currently, elevated inflation is either a sign of a more imminent and persistent problem, or is transitory in nature due to pandemic effects. We still believe that inflation will not pose a significant threat as long as:
• Supply and demand imbalances remain throughout the economy
• U.S. GDP growth lags its pre-pandemic trend line
• Unemployment remains elevated
Our core investment tenets – asset allocation, global diversification, cost sensitivity and marrying your portfolio with a financial plan – remain unchanged. We expect growth to accelerate through 2021 as the economy reopens. Based on that view, we have increased exposure to small and mid-sized U.S. stocks, as well as to traditional value stocks such as financials and industrials.
The 2020 personal tax filing deadline is May 17 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 recent articles 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.