Economic Update 7-19-2021

• Economic data for the week included strong consumer and producer inflation readings, as well as improvements in retail sales and industrial production. Jobless claims also continued to fall, while consumer confidence waned a bit.

• Stocks were mixed globally last week—the U.S. and developed foreign markets lost ground, while emerging markets gained. Bonds fared positively as yields on the treasury curve continued to fall. Commodities were mixed, with crude oil prices pulling back by a few percent, partially offset by ag prices.

U.S. stocks fell back on the week, with broader markets down a percent, but small caps down over -5%, with investor movements away from risk. On the positive side, earnings results for Q2, primarily for the initial bank group last week have been exceeding expectations. However, concerns about increasing Covid Delta variant infections may be weighing on the recently benign sentiment. By sector, defensive utilities and consumer staples fared best, with positive returns. On the other hand, energy stocks fell back by over -7%. Real estate fared positively, led by the more defensive apartment and health care sectors.

Interestingly, stronger stock prices on Friday experienced a minor reversal, following the positive retail sales report. We mention this as another example of the ‘good news is bad news’ theme that has started to increasingly surface lately—it stems from a concern that too many good numbers will cause the Fed to take their taper talk more seriously sooner than expected (before year-end).

Fed chair Powell testified before Congress, and markets were closely listening to his comments regarding inflation. He continued to stay the course on the theme of inflation being ‘transitory,’ as well as ongoing repair still needed in the labor market. This type of accommodative language pleases markets, which hope for the simple answer of low interest rates forever (if possible). Of course, this has started to generate more criticism from some economists who believe that while extreme measures were necessary during the pandemic, the inevitable normalization to a higher-rate reality could keep current inflation (for asset prices as much as goods prices) going at an unsustainable pace. In hindsight, the Greenspan Fed of the 1990s is seen as prioritizing asset prices in this way, which led to some of the excesses of the late decade prior to the 2001 bear market. Also, it could be argued as being a byproduct of very large fiscal spending packages (leading to large M2 bank balances), with investors seeking returns anywhere but 0.01% returns in cash—translating to increasingly negative real returns on a compounded basis.

Foreign stocks fared better than U.S. in local terms, but a stronger dollar brought them largely in line. In Europe, Covid recovery conditions were split between wide reopenings in the U.K., while France and the Netherlands imposed further restrictions as Delta variant cases continue to spread. Emerging markets bucked developed market trends with positive returns, particularly in Brazil, China, and India.

U.S. bonds gained last week, as interest rates continued to tick down across the yield curve. Treasuries and investment-grade credit performed similarly, both beating out high yield and floating rate bank loans. Due to the headwind of a stronger dollar, foreign bonds in both developed and emerging markets were little changed, offsetting slightly lower yields.

Commodities were flattish on the week with falling energy prices were offset by strength in agriculture (primarily in wheat, due to crop shortages). Crude oil prices fell back by over -3% to close just above $71.50, representing the worst week since March, as expectations of additional supply weigh on the global market following an OPEC+ deal between Saudi Arabia and UAE.

Period ending 7/16/2021	1 Week (%)	YTD (%)
DJIA	-0.52	14.45
S&P 500	-0.96	16.12
NASDAQ	-1.87	12.33
Russell 2000	-5.11	10.07
MSCI-EAFE	-0.46	8.76
MSCI-EM	1.72	4.99
BBgBarc U.S. Aggregate	0.24	-0.94

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
7/9/2021	0.06	0.23	0.79	1.37	1.99
7/16/2021	0.05	0.25	0.79	1.31	1.93

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.  FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT