Growing & Reopening Economy

We can say with confidence that the US economy is strong and getting stronger. The re-opening, with growing emphasis on service businesses, is being driven by a consumer with money to spend. Employment numbers are on the rise.

Worries about inflation and the Fed have led to a seesaw in market leadership. At times our strong economic growth prospects have propelled value stocks. At other times, growth stocks have taken the lead including over the last month or two.

Currently, we think it is sensible to take a balanced or “core” approach, with representation of both types of domestic stock funds in your portfolio.

With talk of inflation dominating the financial world, the Fed’s Open Market Committee met in mid-June. Leading up to the meeting the questions had been: Is this above-trend price pressure truly “transitory” as the Fed has been saying? Or will it “stick.”

Clearly the Fed blinked at their meeting, recognizing that even if they prove to be correct about the transitory nature of higher prices, inflation expectations were running too high for their liking. They were able to tramp down expectation for future inflation without changing policy and sending the stock market into a tizzy.

By shifting their “dot plot” forward (with seven of 18 participants now predicting rate hikes as early as 2022) the Fed admitted inflation was a concern to them without the potential tantrum associated with reducing stimulus or raising interest rates. Through the adjustment of the dot plot the Fed has effectively managed inflation expectations.

We acknowledge the possibility of above-trend inflation for longer than the Fed may have hoped. However, we agree with analysts at JP Morgan who looking at expectations from consumers, economists, and investors, don’t see an inflation rate above three percent over the next five years. If that is true, it should allow the Fed to execute an orderly unwinding of stimulus and “normalize” policy without spooking the equity markets.

Looking overseas, most economies are behind the US in the recovery cycle, and many present an intermediate term opportunity. We say intermediate term because, unfortunately, the spread of the Delta covid variant is threating to cause another wave of infection for unvaccinated communities. Beyond the covid threat, we are constructive on Europe and remain positive long-term on emerging markets as well as those economies reflate. Broadly balanced international funds are another way to participate.