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Small-caps stocks continued to surrender momentum, as all the major indexes ended lower. The small-cap Russell 2000 Index underperformed for the third consecutive week, further reducing its lead over the large-cap S&P 500 Index for the year-to-date period.
Growth and inflation data appeared to remain in the spotlight during the week. Stocks fell back on Tuesday, following the release of data showing that headline and core (excluding food and energy) consumer prices had jumped 0.9% in June, roughly twice consensus estimates. It was the fastest 12-month increase in the core rate (4.5%) since 1991. Surging used-car prices were again responsible for about one-third of the increase, but the inflationary pressures were broadly felt by consumers—food prices increased 0.8% in the month, and gasoline prices rose 2.5%. On Monday, the New York Federal Reserve reported that year-ahead inflation expectations had reached 4.8%, the highest on record since 2013.
Fed Chair Jerome Powell’s scheduled testimony before Congress on Wednesday and Thursday may have blunted the negative impact of the inflation data on markets. While acknowledging that the recent spike in inflation was larger than he expected, Powell repeated his view that inflation pressures are temporary and “substantial further progress is still a ways off” in terms of the Fed’s employment and inflation goals. Before raising short-term interest rates, the Fed is widely expected to begin tapering asset purchases designed to keep downward pressure on long-term rates. On Thursday, Chicago Fed President Charles Evans voiced concern about tapering too early, warning it could undercut the Fed’s objectives.
The week’s economic data were mixed relative to expectations. Manufacturing output contracted slightly in June, due largely to carmakers’ trouble finding chips. An index of manufacturing activity in the New York region hit a record high, however, reflecting strength in both new orders and shipments. Weekly jobless claims hit a new pandemic low of 360,000, in line with expectations.
Retail sales rose 0.6% in June, well above consensus expectations for a 0.4% decline. Sales outside of the volatile auto sector—which have been restrained by the global chip shortage—increased 1.3%. The Commerce Department data showed the clear impact of the reopening of the economy, with consumers shifting purchases away from home goods and toward restaurants, leisure, and apparel. Stocks fell back later Friday morning, however, after the University of Michigan’s preliminary gauge of consumer sentiment fell to its lowest level since February, driven largely by inflation worries. “Consumers’ complaints about rising prices for homes, vehicles, and household durables…reached an all-time record,” according to the survey’s lead researcher.
The weeks may press on, but the “song” remains the same: Predicting what comes next is an impossible task. As such, broad-based diversification and professional management are keys to long-term success. Buying opportunities, like we saw Friday and Monday, will continue to abound in the weeks and months ahead, but trying to time the market is a dangerous game. We are blessed as a nation, and we know that our Provider will not challenge us with more than we can handle. Get invested, and trust that everything works within the scope of His knowledge and His understanding is beyond measure. (Psalm 147:5).
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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