Fed Fuels Markets

August 27th, 2021

After last week’s dip due to concerns over delta’s potential impact on global growth, markets were back to breaking records once again this week. The S&P 500 registered its 52nd record close of the year on Friday, closing out the week’s trading at a record high of 4,509.37. Bulls came out of the gate swinging on Monday’s announcement that the Food and Drug Administration would grant full approval to Pfizer-BioNTech’s two-dose Covid vaccine for individuals 16 years of age and older. While the announcement may incrementally induce some individuals to get the vaccination on their own, more significant is the fact that it now gives the necessary legal cover for companies to require vaccination and establish policies accelerating a return to the office. The Federal Reserve also gave markets a shot in the arm during its virtual Jackson Hole conference. Fed Chairman Jerome Powell signaled that the central bank would remain accommodative, even as it announced it would begin tapering its bond-buying program later this year. Powell indicated that the Fed Funds rates would likely remain near zero for an extended period of time and that the recent inflation spike would likely normalize in time. In economic news, personal income recorded its biggest jump since March, while consumers continued to spend on services and homes. For the week, the S&P 500 posted a solid 1.52% gain.

Buyers Unfazed by Hefty Price Tags

Record prices for new homes failed to keep homebuyers sidelined in July. With limited existing home sales inventory, homebuyers have continued to gravitate towards new homes. Sales of new homes rose 1.00% in July to an annual rate of 708,000. The strong demand helped push the median price to a record high of $390,500. The rise in the median price of a home was driven by strong demand in the West which saw sales increase 14% month-to-month. Sales could remain healthy in the short-term as builders delivered some fresh units to the market with the number of new homes for sale at month end up 5.50% month-to-month. Inventory stood at 6.2 months, representing the highest level in over a year. The increased supply is a short-term positive for hungry homebuyers. It will be difficult to maintain that current pace of supply, however, considering the high costs of labor, land, and materials. 

Despite limited supply and high prices, existing home sales also rose in July, up 2.00%. That was the second consecutive monthly increase. As has been the case recently, the higher end of the market continued to drive sales and prices. The median price of an existing home sold hit $359,900, up 17.80% from a year ago. Inventory remained tight with 1.32 million homes on the market at month end, down -12% from a year ago. That represents a 2.6-month supply at the current sales pace. By comparison, a six-to-seven-month supply is considered a healthy balance between supply and demand. A continued economic recovery combined with low mortgage rates should continue to drive demand for homes.  

Expanded Child Tax Credit Lifts Personal Income and Spending

Household income rose 1.10% in July, boosted by the expanded child tax credit for lower and middle-income families authorized by Congress this past spring. Despite the bump in income, consumer spending decelerated to 0.30%. That was less than expected and less than a third of June’s spending increase of 1.10%. Rising concerns over the delta variant seemed to prompt consumers to cut back on their spending as they limited their activities. Consumers certainly have the capacity to spend, but it is likely that spending will continue to moderate as we progress through the third quarter. Many service-oriented businesses have announced they would be cancelling a number of events including concerts, conferences, and festivals. Like so many things in life these days, spending remains “Covid dependent”, but with several models predicting peak case counts being reached in late August or early September, the hope is that things normalize in time for the busy holiday shopping season.

Markets certainly managed to look at the Fed’s statements this week as a cup half full. On the one hand, Powell confirmed the Fed would begin tapering its bond purchases later this year. While various Fed governors have recently been suggesting as much, it was surprising that the actual acknowledgement of this by the Fed chairman did not garner more attention. Instead, it was how he qualified his statements that seemed to bring such relief. His comments were short on detail on how any eventual tapering would work, but by signaling the Fed was not in a hurry and not seemingly concerned by recent inflation, markets were able to relax. Some had believed the Jackson Hole symposium would be used as a forum for announcing a new policy shift and once investors understood that was not going to be the case, this allowed the markets to rally to close out the week.   

 

The Week Ahead

With the Labor Day holiday around the corner, the unofficial end of summer is upon us. The next Week in Review will be on Friday, September 10th and will include the latest reports on nonfarm payrolls, manufacturing, services, and inflation.

 
 
 

The Great Resignation

The Great Resignation is a term first coined by Texas A&M’s Anthony Klotz to describe a mass, voluntary exodus from the workforce. Klotz noted that when there is uncertainty – as there was with the pandemic – people tend to stay put and ride it out. Workers may be less inclined to flee a job when millions of Americans were losing theirs. With more businesses reopening and with the rollout of vaccines, the pent-up demand to quit is being unleashed, and the Great Resignation is upon us. It is creating one of the most complex and confusing job markets in history.

According to the U.S. Department of Labor, during the months of April, May, and June 2021, a total of 11.5 million workers quit their jobs. Recent research indicates this mass departure is likely not over. A survey released this week found that 55% of Americans plan to seek new jobs in the coming year, and many plan to make a change within the next six months.

So what is going on here? The pandemic created a radical sea change in attitudes. People are learning they can live on less, looking for more flexibility, and pursuing jobs that bring greater happiness or higher incomes.  They may have adapted to a work-from-home or work-from-anywhere lifestyle that the past 18 months provided and find that they don’t want to go back into an office, return to a long commute, or go back to working longer hours. In normal times, people quitting jobs in large numbers signals a healthy economy with plenty of job opportunities. But these are not normal times. The pandemic led to the worst recession in U.S. history with the economy contracting 3.5% in 2020.  However, the economy has done well recently. Really, really well. And, it’s growing fast. The economy grew at a 6.4% rate in the first half of this year. It’s considered one of the fastest recoveries in overall economic activity ever.  

The unprecedented U.S. economic rebound is happening with one of the lowest rates of labor force participation and a record number of unfilled jobs.  There are 6.1 million fewer Americans working now than in February 2020, just prior to the pandemic.  Usually in the months or years after a recession and when the economy is in recovery mode, the labor market remains slack as job seekers greatly outnumber job openings. However, despite the rebound, millions of people are still unemployed – even as many businesses struggle to find workers to fill open positions.  The Department of Labor reported that there are some 8.7 million unemployed workers. At the same time, job placement site Indeed estimates there are about 9.8 million job vacancies. Some argue that the expanded unemployment benefits passed as part of the Covid relief package are dissuading Americans from returning to the workforce. Those benefits ­­are set to end in September. Others say that lack of childcare and fear of the virus are keeping many workers on the sidelines.

Companies are pulling out all the stops to fill those vacancies. This includes offering higher wages, increased benefits, greater job flexibility, remote work, and providing signing bonuses to attract workers. Scott Hamilton, global managing director for the human resources and compensation consulting practice at Gallagher, a global consulting firm, said, “One of the biggest factors is employers are essentially having to buy back job applicants’ Covid lifestyle.” Employers are using incentives such as pet insurance, a perk that is expected to rise 27% in the next two years. Some restaurants are offering profit-sharing to their employees. Target and Walmart announced a tuition reimbursement program to help employees with the cost of higher education. Other employers are offering childcare and eldercare benefits.

If you are contemplating leaving a job, financial advisors note there are a number of considerations to take into account. At a minimum, calculate your monthly expenses and see what is needed to meet them and how much financial runway you might have should you decide to leave without having another job lined up.  Hiring managers will often advise that it is generally easier to find a job if you already have one, plus you will be in a better position to negotiate a salary.  Workers considering retiring should meet with their investment advisor to discuss how best to position their portfolio for retirement. If you are considering any drastic moves that could impact your financial future, we hope you will speak with your financial advisor first.

 
 
 

Important Disclosure: The information contained in this presentation is for informational purposes only. The content may contain statements or opinions related to financial matters but is not intended to constitute individualized investment advice as contemplated by the Investment Advisors Act of 1940, unless a written advisory agreement has been executed with the recipient. This information should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities, futures, options, loans, investment products, or other financial products or services. The information contained in this presentation is based on data gathered from a variety of sources which we believe to be reliable. It is not guaranteed as to its accuracy, does not purport to be complete, and is not intended to be the sole basis for any investment decisions. All references made to investment or portfolio performance are based on historical data. Past performance may or may not accurately reflect future realized performance. Securities discussed in this report are not FDIC Insured, may lose value, and do not constitute a bank guarantee. Investors should carefully consider their personal financial picture, in consultation with their investment advisor, prior to engaging in any investment action discussed in this report. This report may be used in one on one discussions between clients (or potential clients) and their investment advisor representative, but it is not intended for third-party or unauthorized redistribution. The research and opinions expressed herein are time sensitive in nature and may change without additional notice.