June 25, 2021
Markets rocketed to yet another record high this week on a string of announcements from Capitol Hill and safe economic data. After months of discussions, Wall Street cheered news that a bipartisan group of Democrats and Republicans had struck an agreement for a $1 trillion infrastructure deal early Thursday. The stripped-down proposal focuses on funding the nation’s physical infrastructure, namely transportation, water, and broadband. As positive as this announcement would have been, by mid-afternoon the bipartisan goodwill had faded after it was announced that Democrats would pursue a separate “human” infrastructure bill, aimed at increasing spending on education, healthcare, anti-poverty and other social programs largely opposed by Republicans. The Democrats’ choice to use the reconciliation process, which only requires a simple majority to pass the newly proposed bill, along with Biden’s commitment that he would only sign both bills in tandem, irked Republicans and deflated hopes for a quick resolution. Elsewhere, Fed Chairman Jerome Powell used his testimony on Capitol Hill this week to reassure markets that interest rates will continue to remain low despite the recent jump in prices. He expressed the Fed’s continued belief that the recent inflationary pressures will be temporary, subsiding once pandemic induced supply and demand imbalances are corrected. Powell went on to emphasize the U.S. economy remains at risk from residual threats from the Covid-19 pandemic, thus justifying the Fed’s accommodative posture. Hard hitting economic news was limited this week but the reports that were released managed to suit bulls’ palates. Home sales, while strong, continue to cool due to the lack of affordability. Meanwhile, household spending sputtered in May as consumers shifted spending from goods to services and as personal income dropped now that government stimulus payments have subsided. Initial claims for unemployment also remained elevated above the 400,000 level for the second week in a row, suggesting that the labor market recovery is still choppy. For bulls, there was just enough “disappointment” in the reports to believe the Fed will have their backs, which when combined with the prospects of another $1 trillion in government spending was sufficient to send the S&P 500 higher by 2.74% to an all-time high of 4,280.70.
Homes Sales Cool on Scorching High Prices
It’s a tough time to be in the market for a new home due to tight inventory and soaring prices. Sales of existing home sales fell -0.90% in May to a seasonally adjusted annualized rate of 5.8 million units. That was the fourth straight, monthly decline in volume. Prices were an entirely other matter. The median price of an existing home was $350,300 – up 23.60% from a year ago – making it the highest median price ever recorded. Prices however are being skewed by the fact that there is very little inventory at the lower end of the market, meaning that the higher end volume and prices are skewing the median price. Overall, supply remains tight with just 1.23 million homes on the market at the end of May, a -20.60% drop from a year ago. The current inventory level represents a 2.5-month supply. In comparison, a six to seven months supply is considered a healthy balance between supply and demand. For new homes, sales fell -5.90% in May to a seasonally adjusted 769,000 units as prices continued to soar. The median sales price for a new home was $374,000, 18.10% higher than a year ago. The housing market can only be described as very tight right now. Consumer’s appetite for real estate is back in vogue, which with limited supply and higher raw material and labor costs, is starting to price folks out of the market despite low interest rates.
A Tale of Two Consumers
Household spending was flat in May as personal income fell -2.00%. The decline coincides with many households no longer having extra income due to the curtailment of several government stimulus programs. At the same time, rising vaccination rates as well as a drop in Covid cases have prompted consumers to shift the nature of their spending from big-ticket items to services. As a result, household spending is starting to show greater socioeconomic divergence. Households with incomes of more than $200,000 spent 16% more on restaurants in May than in April. Meanwhile, households with incomes between $31,000 and $60,000 increased their spending by a more modest 5%. This is not an unexpected given that affluent households have more capacity to spend, but to the degree that the pandemic resulted in more affluent households disproportionately increasing their saving, this is now being played out in reverse.
One would expect fireworks on a week where the S&P 500 rose to a new record high. That was not the case. The record high came uneventfully. There were the noted economic releases and announcements from Capitol Hill, but the thrust of late has come from the market getting comfortable with interest rates, inflation, and the belief that the Fed will sit pat. Anxiety has drifted away and asset prices have re-inflated along with it. Valuations aside, fundamentals look good. Sentiment is good. Government spending, from the market’s perspective, is good. The key is “good” (because “too good” is really bad in market think), and “good” is what we’ve got as we head into the year’s second half.
The Week Ahead
The year is flying by and although it’s hard to believe, the Fourth of July weekend is upon us. The NYSE and our office will be closed on Monday, July 5th in observance of the holiday. Week in Review will return on July 9th with a rundown of the latest jobs, manufacturing, and services numbers.
Let Freedom Ring