Economic Update 6-21-2021

• Economic data for the week included strength in industrial production and housing starts, but offset by weaker retail sales results. Initial jobless claims rose slightly, although the overall rolls continue to improve. The U.S. Federal Reserve kept interest rates on hold (at zero), as expected, but several committee members assumed some tightening by 2022-23.

• U.S. equity markets declined last week along with slightly more ‘hawkish’ Federal Reserve language about future interest rate policy—acknowledging a steady return to normal. Foreign stocks fared a little better in local terms, but were held back by a stronger dollar. Bonds were flattish in the U.S. on net, despite some rate volatility during the week, and outperforming foreign debt. Commodities were down across the board sharply, aside from higher prices for crude oil.

U.S. stocks fell back along with the disappointment over the Federal Reserve’s ‘hawkish’ tone mid-week. This was exacerbated by a Fed President later adding that a hike could in fact happen as soon as late 2023. By sector, the ‘value’ group took the brunt of the damage last week, with financials, materials, and energy all down over -5%. Technology fared best, ending flat, followed by health care and consumer discretionary stocks, which suffered minor declines. Higher-beta small cap stocks were hit far harder than large caps.

How ‘hawkish’ was the Fed’s tone? Only if it were to describe common sense. The FOMC indicated that tapering and eventual rate hikes have a greater likelihood of occurring in 2022 and 2023. Should investors be worried? The tapering of large bond purchases starting in perhaps late 2021/early 2022, along with rate hikes a year later appears perfectly reasonable given the quick recession and recovery of the past year. Markets merely don’t want the party to end (a few years from now), although it would be unreasonable for it not to. Thought of this way, if conditions were bad enough a few years from now that a rate hike wasn’t advised, we’d likely have more to be concerned about in the economy than a slight tightening of monetary policy (which ironically could result in stress-induced bond-buying and again-lower rates). Bringing rates down to zero has been an emergency measure, used twice in the last 15 years, but should not be thought of as normal operating procedure. The accompanying negative real interest rates don’t make economic sense long-term. Eventual higher rates are the ‘punishment’ for underlying fundamental improvement. (Savers may disagree.)

Foreign stocks behaved slightly better than U.S. markets in local currency terms, with sentiment focused on local Covid recovery conditions and Federal Reserve accommodation, but ended in line with domestic stocks due to a stronger U.S. dollar. (The dollar has tended to fare well when prospects for stronger growth conditions and/or higher interest rates are expected.) The mood was somewhat helped by dovish ECB policy language, in light of continued Covid struggles on the continent. The U.K., in particular, was forced to delay a broader reopening for a few weeks due to the dramatic rise in cases from the new ‘Delta’ variant, which appears to be more contagious and dangerous. However, inflation in the U.K. rose a bit to 2.1%, above target, but showing that the recovery abroad continues to lag that of the U.S. Emerging markets fared better than developed markets, as minimal declines in China and Brazil outweighed deeper declines in more cyclically-sensitive nations.

U.S. bonds experienced minimal change last week on net, despite an equity drawdown and rate volatility mid-week upon a Fed meeting later described as ‘hawkish’ toward future policy. The move away from risk favored long-term treasuries, pulling yields down by over 10 bp on the 30-year, which offset the otherwise negative-for-bonds Fed news. Despite more dovish language on monetary policy in Europe to offset the less accommodative language in the U.S., a stronger dollar pushed foreign bond returns negative in both developed and emerging markets.

Commodities generally fell across the board last week, with a stronger dollar being the primary driver. Energy represented the only gaining group, while agriculture and metals declined by over -5% each. The price of crude oil ticked up by a fraction of a percent to above $71/barrel, as expectations for demand continued to tick upward along with increased economic activity.

Period ending 6/18/2021	1 Week (%)	YTD (%)
DJIA	-3.40	9.79
S&P 500	-1.87	11.71
NASDAQ	-0.26	9.21
Russell 2000	-4.17	13.78
MSCI-EAFE	-2.40	8.92
MSCI-EM	-1.45	6.25
BBgBarc U.S. Aggregate	0.11	-1.60

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2020	0.09	0.13	0.36	0.93	1.65
6/11/2021	0.03	0.16	0.76	1.47	2.15
6/18/2021	0.05	0.26	0.89	1.45	2.01

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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