Post On: June 17, 2021
As the heat of summer intensifies, so does the vacillation of key economic factors affecting the markets. Last week, a sharp decrease in longer-term bond yields helped push the S&P 500 Index to a record high. A decline in yields favors growth stocks by reducing the implied “discount” on future earnings. In other words, lower interest rates increase the anticipated value of future earnings, because future earnings are determined using a present value calculation that relies upon current interest rates as a discounting factor for those earnings. The lower the interest rate, the lower the discount and, in the end, the higher the anticipated future value.
At the same time, however, this decline hurt financial stocks by threatening their lending margins to consumers (which are correlated to those yields). The technology-heavy Nasdaq Composite Index outperformed and marked its fourth consecutive weekly gain, while the narrowly focused Dow Jones Industrial Average recorded a modest loss. Health care stocks led within the S&P 500.
Interest rates and inflation continue to dominate sentiment, as the country stares down the massive amounts of cash infused into the economy over the past two years. The yield on the benchmark 10-year U.S. Treasury note decreased throughout most of the week, seemingly pushed lower by recent assurances from Federal Reserve policymakers that they would keep monetary policy highly accommodative for “some time” and that the recent spike in inflation would prove temporary. On Thursday, yields jumped briefly after the Labor Department reported that core (not including food and energy) consumer prices had risen 0.7% in May, well above the consensus estimate of 0.4%.
Longer-term inflation expectations appeared to remain contained, however. The University of Michigan’s survey of consumer sentiment, released Friday, showed that Americans expected prices to rise 4% in the current year, versus the previous month’s read of 4.6%. Consumers also grew more confident, with the survey’s overall sentiment gauge reversing much of May’s decline.
Policy developments may have also supported sentiment. On Thursday, a bipartisan group in the Senate reached a deal on an infrastructure plan that would not raise corporate taxes, as the Biden administration had proposed. The plan would also include just $762 billion in new spending, significantly less than the roughly $2 trillion the White House had originally requested. According to reports, Republican leaders indicated they were open to the proposal, but it remained unclear if the President and Democratic leaders in Congress would agree to the scaled-back plan.
As news surrounding this infrastructure deal and 2022 tax law changes heats up, we will surely see continued impact on a myriad of market factors. Thankfully, as with all things, we have the Branch of the Lord to keep us cool and calm during these times. “(He) will be a shelter and shade from the heat of the day, and a refuge and hiding place from the storm and rain.” Isaiah 4:6. Of course, our team doesn’t plan on resting on its laurels, and we continue to make adjustments designed to take advantage of the current uncertainty, while also preparing for the likely changes ahead.
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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