By Tim Courtney, Chief Investment Officer
This year, the market needed to see the proof justifying the surge in prices. For the most part, the last few months have delivered.
Several key indicators are well within their normal range and improving, including the unemployment rate which is 5.9%1, retail sales have improved to healthy levels2, and the CBOE Volatility Index (VIX) is currently 17 and has mostly stayed below 20 for weeks.3 Gross domestic product (GDP) is also at 6.4% on the high end of normal.4 While many market measures are supportive of current price levels, there are always other variables that can move markets.
Some uncertainty in the markets right now is being caused by rising COVID-19 infections in areas where the Delta variant is making containment more difficult. Additionally, even though there have been discussions of broad tax and regulatory proposals earlier in the year, updates have not yet materialized. Investors are still waiting to hear more specifics on potential corporate tax rate changes, capital gains rates, and estate tax exemption levels.
One of the biggest issues for markets is the direction of inflation and interest rates. Inflation has risen 5.4% from last year, one of the highest readings in decades.5 Amid rising inflation concerns, consumer sentiment for July unexpectedly fell to 80.8.6 Labor shortages also indicate that business is not quite back to normal which could prolong inflation or begin eating into company profit margins.
Even as inflation numbers have risen, interest rates have fallen, causing inflation in another area: real estate. Home prices continue to set records and rent has been moving higher too.7 The market remains focused on this push and pull between interest rates and inflation, and this has played a primary role in stock market pricing over the last few months.
Thankfully, the issue stock investors are most concerned about, earnings, have been strong. We are approaching the core of second-quarter earnings announcements and indications are the earnings are building off fourth- and first-quarter strength. These earnings are supporting markets and are helping to lower stock valuation metrics which had reached very high levels late last year.
So what does this mean for investors? It is important to have cash on hand but to avoid holding excess levels of cash. With the current inflation, cash has lost about 5% of its purchasing power8 over the last year. Also, summer months have typically had slightly higher volatility and we shouldn’t be surprised if markets begin to move more strongly based on some of the variables noted above. If you have questions about your portfolio allocation, please contact your Exencial advisor.
- Bloomberg (7/2/21) — U.S. jobs jump by most in 10 months as economy gains steam
2. Yahoo Finance (7/19/21) — Retail sales bounce back to pre-pandemic highs
3. Yahoo! Finance (data as of 7/23/21) — CBOE Volatility Index
4. Bloomberg (4/29/21) — U.S. recovery gains steam as spending fuels 6.4% GDP growth
5. CNBC.com (7/13/21) — Inflation climbs higher than expected in June as price index rises 5.4%
6. Reuters (7/16/21) — U.S. consumer sentiment drops in early July on inflation fears
7. CNBC.com (7/12/21) — Homebuyers are finally catching a break as new listings rise and mortgage rates drop
8. CNBC.com (7/13/21) — Inflation climbs higher than expected in June as price index rises 5.4%
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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