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inflation

There’s no doubt that the United States economy is still in a recovery phase. The first and second quarters of the year have shown significant economic growth—leading economic indicators are back to their pre-COVID levels. Americans are heading back into the workforce and spending the cash they saved last year. In our second quarter of 2021 economic update webinar, we discussed market growth, declining unemployment, and the reality of inflation.

Markets

The markets saw an incredible rebound in the second quarter, with the energy, real estate, and financial sectors showing the most growth. The industries that were hit hardest have seen the most significant growth, while consumer staples saw positive, yet smaller, growth.

The factors that will continue to drive the markets in the second half of the year will be:

  • COVID-19 vaccines and variants
  • Corporate earnings
  • Consumer spending and re-employment
  • Interest rates and inflation

In the first two-quarters of 2021, corporate earnings exceeded expectations with year-over-year growth at its highest since 2010, going well beyond the expectations of Wall Street’s analysts. As long as consumer spending continues, we expect that corporate earnings will continue to see exceptional growth throughout the remainder of 2021 and beyond.

Unemployment

Unemployment claims continue to decline; currently they are around 6% and have yet to reach their pre-pandemic rates. The unemployment rate is less than half of what it was a year ago. Looking deeper, we note that the nation is seeing variations in unemployment rates at a regional level. Florida is well below the national average, while California and New York are well above it. Unemployment rates are in part due to nearly 7 million fewer jobs than the country offered pre-COVID. However, employers are reporting millions of job openings and stating that the key to economic recovery is getting people back into the workforce.

Inflation

One of the biggest economic headlines of the year has been inflation. While the Federal Reserve has increased its balance sheet, we don’t believe this to be directly correlated with the rate of inflation, or a cause for concern. It’s important to keep in mind that inflation rates are computed year over year. In 2020, Americans couldn’t go out and spend money with government restrictions and lockdowns. The year-over-year comparisons to the current day, where many people are back to normal spending habits, make inflation look dramatic. With Americans back to spending, demand is increasing while supply remains low in many sectors. That dynamic has led to increasing prices, which looks like inflation when compared to the previous year of no inflation/dropping prices. Market-based indicators, such as interest rates and long-term government bonds, aren’t signaling inflation as we are seeing long-term interest rates remaining at historic lows.

The US dollar remains strong, sitting at about the same place as it has been for the past decade. The long-term economic growth trend continues and is on-trend with the previous long-term bull markets, despite the drastic ups and downs of the past year. These are both further indicators that inflation is not out of control, but it does warrant monitoring.

GDP and Consumer Confidence

GDP has seen significant growth year to date, with Q2 showing an increase of 6.5%. With vaccines rolling out, unemployment decreasing, and life going back to pre-pandemic norms, consumer confidence is on the rise. Americans have pent-up savings and stimulus checks to spend, putting the consumer confidence index back to where it was in March 2020. While spending on credit cards has increased, outstanding balances continue to decrease.

U.S. Consumer

Consumer finances are in incredibly good condition, despite the situation that millions have faced over the past year. Household debt service ratios are at multi-decade lows. Compared to the period following the most recent great financial crisis, we are seeing extremely low levels of household debt. This insight is incredibly positive for the economy as consumers have the ability to spend with low debt and near record-high savings. As of Q2, consumer spending is at pre-COVID levels.

Investing in Turbulent Times

Continue to invest in companies, not headlines. There will always be uncertainty in the markets. Stick to your long-term strategy and ride the waves while avoiding emotional decisions. Diversifying your investments will continue to be the best way to safely grow your portfolio and will also enable you to get through uncertain times. There will always be an industry that is at the top, while another is at the bottom. Having diversity in your portfolio will minimize your risk of significant losses.

Potential legislative changes continue to be a concern, with possibilities of rising corporate, individual, and estate taxes all making headlines. Until there is a law in place, refrain from making any rash or permanent decisions based on potential changes. Subscribe to the GunnChamberlain YouTube channel for solid tax and financial news.

If you have any additional questions regarding the current economic conditions or want to speak with a financial advisor, please reach out to our team.

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