Updated April 16, 2021
Our investment team remains committed to sharing regular updates and market insights to keep you informed. Please look for our next update on May 7.
Inflation Starts to Rise
We are seeing signs that inflation is beginning to accelerate. The March Consumer Price Index (CPI) rose 2.6 percent year-over-year and the Producer Price Index was up 4.2 percent. Both were above expectations as were the March Export and Import Price Indexes. We do not expect inflation-related issues to be a major concern in the near future, but it will likely become a hotter topic of discussion as we go forward.
Some inflation is considered a good thing since it promotes demand for goods and services, driving economic growth. However, high rates of inflation hurt those holding dollar-denominated assets, such as cash or bonds and those on a fixed income. It also promotes speculation as investors take on more risk in hopes of achieving returns greater than the rate of inflation. Finally, high inflation negatively affects businesses, workers and consumers as it adds uncertainty to buying, selling and planning decisions.
Last year, the Federal Reserve announced that they changed their inflation target from 2 percent to an average of 2 percent. Fed Chairman Jerome Powell has stated that since inflation has been generally below 2 percent for an extended period of time, the Fed is OK with inflation running a bit higher than that level for a while. We do not expect the U.S. to get anywhere near the inflation rates of the 1970s and early 1980s. Globalization and increasing technology are deflationary by nature and will help ease inflationary pressures. The Federal Reserve also has powerful tools for combating inflation. However, the use of these tools can be blunt and the timing can be disruptive to markets. Again, we do not expect these concerns to be realized in the near future, but we may have to address the subject toward the end of the year and into 2022.
Equity Markets Continue Their Upward Trajectory
Equity markets continued their march higher over the last two
weeks. The S&P 500 and the Dow Jones Industrial Average both hit record highs
this week and are up more than 11 percent for the year. The tech-heavy NASDAQ
also gained ground, and is up approximately 9 percent year-to-date, approaching
record levels. Stocks have benefitted from a pause in the recent increase of
interest rates and the expectations for a strong earnings season. This week
marks the unofficial start of the first quarter company earnings season. Some
major Wall Street banks, including JPMorgan Chase, the Goldman Sachs Group and
Wells Fargo, kicked things off by posting record quarterly profits. Strong
results are expected for companies in most industry sectors.
Rise in Bond Yields Takes a Break
Intermediate and long-term bond yields pulled back a bit after rising strongly to begin the year. The benchmark 10-year U.S. Treasury bond had risen from 0.93 percent at the start of the year to a recent high of 1.77 percent. It has since pulled back to approximately 1.56 percent. It is typical to have a period of stabilization after sharp moves in interest rates. However, we do expect intermediate and long-term rates to trend higher throughout the year, given the fading of the pandemic, the strengthening economy and unprecedented economic stimulus.
Retail Sales Surge
Retail sales were up 9.8 percent month-over-month, nearly double
the 5 percent that economists had expected. Auto sales and building materials
were leading contributors. This should translate into strong GDP growth as
consumer spending accounts for nearly 70 percent of U.S. GDP.
What Should I Be Doing With My Investments?
We encourage you to pay attention to the latest developments, but not to lose sight of your long-term investment strategy. Reach out to our investment team to discuss your options and reaffirm your timeline and goals. Call our investment team at (518) 415-4401.