The equity markets continue to move higher on news of steady economic growth and the receding COVID virus. The S&P 500 Index has grown in each of the first seven months of the year and when this has occurred historically, it has led to further gains through year-end. Recent economic indicators are demonstrating slower and more stable U.S. domestic growth and that has inspired optimism for future earnings.
The COVID Delta variant is causing product and supply constraints for the complex global just-in-time inventory management system. The slowdown in production, shipping and trade -- especially from China, Vietnam, Malaysia, and Indonesia -- has led to delivery delays for microchips, laundry machines, and cars. Fewer goods in inventory, with accelerating consumer demand, has led to price inflation, but the product and service sales slowdown is disinflationary, so interest rates are likely to stay lower for longer.
With GDP growth of 6.7% in the second quarter, we should expect the Federal Reserve to begin tapering its bond purchases before year-end. A growing economy with accelerating employment should provide confidence in sustained momentum. The Quantitative Easing program needs to end like training wheels need to be discarded when confidence, speed, and momentum are sustained. Most investors expect it will be later this year or 2022 before they reduce their Treasury, Agency, and Mortgage-Backed Security purchases. This does not mean that interest rates will rise, and Federal Reserve Chairman Jay Powell was clear in his statement about this.
Monetary support, which is still accommodative, may be supplanted by more fiscal support of the new, highly debated infrastructure bills. These potential spending programs will be massively stimulative, but any tax increases will be a deterrent to growth. The market cannot assess the odds or the size of any infrastructure package especially after the Biden Administration’s loss of credibility in the Afghanistan withdrawal. We are monitoring this closely as it may impact markets in the next few weeks.
Each month, the downside volatility of the equity market has been met with more investors “buying the dips” and supporting the market valuation. Recently, the market rotation from growth to value stocks supported the energy, industrial, and financial sectors, but this stalled and information technology and communication services sectors returned to favor. We have a balance of both types of stocks in the portfolios we manage, which has helped our performance this year. Since monetary and fiscal policy remain supportive for equity valuations, we are still constructive for the next few quarters.
Year-to-Date Index Performance
S&P 500 Index........20.6%
Mid Cap 400 Index........19.4%
Russell 2000 Small Cap Index........15.1%
MSCI AWCI International Index.......14.7%
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