Updated June 18, 2021
Our investment team remains committed to sharing regular updates and market insights to keep you informed. Please look for our next update on July 9.
Markets Continue Slow March Higher
Equity markets continue to trade near all-time highs, while market volatility has dropped to levels not seen since the start of the pandemic. The Chicago Board Options Exchange Volatility Index (VIX) recently fell below 16 for the first time since February 2020. The index had been over 80 during the market selloff in March 2020. This indicates that market fears continue to recede following last year’s short but extremely steep bear market.
We have seen a change in market leadership over the last several trading sessions, as technology stocks have outperformed recently after lagging for much of the year. On the other hand, financial stocks have given up some of their gains after being market leaders for much of 2021. The tech-heavy NASDAQ hit a record high earlier this week and is up nearly 10 percent year-to-date. The S&P 500 is up approximately 12 percent.
Inflation Is Still a Hot Topic
Last week, the May Consumer Price Index (CPI) data was released showing a 5 percent gain year-over-year. This came on the heels of last month’s 4.2 percent gain. Core CPI, which removes volatile food and energy prices, showed a still strong 3.8 percent gain. This week, we received the Producer Price Index (PPI) data that showed a 6.6 percent gain. All of these data points came in above economist expectations. Interestingly, market reaction was muted for both equities and bonds. The benchmark Ten-Year Treasury Bond yield actually dropped slightly, falling below 1.5 percent.
Fed Keeps Rates Near Zero
As expected, the Federal Reserve Open Market Committee (FOMC) unanimously voted to keep its benchmark short-term borrowing rate anchored near zero on Wednesday. However, officials indicated that rate hikes by the end of 2023 were likely, after saying in March that increases were not expected until 2024. The FOMC also expects the inflation rate to be 3.4 percent for 2021, a full percentage point higher than their March projection. They did comment that they expect the higher inflation data to be transitory. After the current spike, the Fed expects inflation to trend back toward its 2 percent goal over time.
On another note, the Fed raised their full-year 2021 Gross Domestic Product (GDP) estimate to 7 percent, up from 6.5 percent. This would result in 2021 being one of best years for GDP growth since 1950. They also estimate that the unemployment rate will hit 4.5 percent by year-end. The May unemployment rate was 5.8 percent.
Finally, the Fed announced no changes to their plan to continue to repurchase $120 billion of Treasury and mortgage bonds each month until “substantial further progress” has been made in the recovery. This repurchase program has been in place since June 2020 and is likely one of the main reasons intermediate and long-term interest rates have not risen higher, even with the spike in inflation data.
What Should I Be Doing With My Investments?
We encourage you to pay attention to the latest developments, but not to lose sight of your long-term investment strategy. Reach out to our investment team to discuss your options and reaffirm your timeline and goals. Call our investment team at (518) 415-4401.