Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 24

Happy Monday. Hope you were able to stay cool last week. It was a hot one. Also hope you also had a great weekend and enjoyed Father’s Day and the longest day of the year. It was hopping here in Omaha with the College World Series opening, the U.S. Swim Trials, and a wedding reception.

Markets Update

It was also hopping in the markets last week. The week ended up being the worst in 4 months for the S&P 500 and the worst for the Dow Jones Industrials since last October.    

Still, the overall U.S. market only lost nearly 2% last week. The S&P 500 also did hit a new all-time high early last week. Other indices remain close to all-time highs. The market is still up nearly 5% for the quarter and over 11% for the year. It was only the “worst” week in a while because we have had so many great weeks over the last year. 

Updates from the Fed

The primary driver for the move was the shift in official Federal Reserve language. Wednesday’s FOMC meeting represented the first significant derailment of the recovery’s “Goldilocks outcome.” This included the Fed’s official expectations for inflation moving notably higher, and their expectation for two rate hikes sooner than expected (by the end of 2023). 

Some of the highlights from the Fed last week included the Summary of Economic Projections showing two hikes in 2023, with seven members of the committee (almost certainly all regional Fed Presidents, who are not permanent voters) expecting hikes in 2022. The median FOMC member sees core inflation up 3.0% this year (versus 2.2% in March) and raised 2022’s forecast to 2.1% from 2.0%. Growth was also raised for 2021 (to a 7% median forecast) and 2023 (to 2.4% median), while the median unemployment expectation is 3.8% by the end of next year. 

Deeper Dive

Arguably another consideration for the last week’s movement was profit-taking in cyclical stocks (such as small caps and value stocks) which had easily gathered the most flows, attention and favor this year. Last Thursday, for example, according to Morgan Stanley, secular growth stocks outperformed cyclicals by nearly 5% – in one day!  Growth stocks were actually higher last week and have now outperformed value stocks by over 8% this month!

Is this a tide change in relative performance? It could be, but it also shows the dangers of headline investing. The markets are a leading indicator of the economic data, while headlines of course lag the data. For example, cyclicals started to notably outperform last year in the depths of economic weakness; and now, as economic growth and inflation data are racing higher (at least for now), the markets are already apparently moving on to what might come next in the back half of 2021. This could mean that economic growth, while still strong, could slow. It also means that inflationary pressures should also cool (though could still be above-average). 

Bottom line, we believe the stock market outlook remains bullish. The overall backdrop really hasn’t changed: the economy is getting stronger, the Fed remains very supportive, and the momentum in the market remains net bullish. We believe investors should remain invested and remain diversified. 

Given the recent equity market weakness, it was a strong week for the U.S. dollar last week. After hanging around and holding above 5-year lows, the Bloomberg U.S. Dollar Index  is now moving above various moving averages for the first time in months. This is a signal for more dollar strength. 

Next week looks to be a busy one with Fed Chair Powell testifying in front of Congress, GDP data, Amazon Prime Day, Fed stress tests, and more. 

Bitcoin last week moved slightly lower but had a rough weekend and is starting off the week moving even lower. Current price (as of this writing) is just above $32,000. That’s half of the price from mid-April. 

Speaking of crypto, the next episode of Orion’s Weighing Machine publishing this week will feature Chris King from Eaglebrook Advisors. The fascinating interview talks about the future of crypto and how advisors and investors should be able to invest in it in the future.

For more resources on the economy and markets, including partner content, please review the Orion Portfolio Solutions Financial Advisor Success Hub.

As always, please let me know if you have any feedback or questions. You can reach me at rusty@orion.com. 

Have a great week!

1870-OPS-6/21/2021

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