No Fireworks but Markets Hit 33rd All-Time High of the Year

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

The upcoming July 4th holiday is an opportunity to celebrate the birth of our nation and our independence. This year,  the holiday holds greater significance and promise. The White House announced plans for an “independence from the virus” party on the South Lawn on July 4th to not only mark our independence as a nation but also to mark our independence from the restrictions of COVID.
A year after the pandemic resulted in the mass cancellation of July 4th parties and celebrations, we are entering what is being called “the summer of freedom.” Americans are ready to display their patriotism and enjoy celebrations that weren’t possible last year. The rollout of vaccines has aided the country’s effective return to normalcy after 16 months of pandemic disruption. Next week’s festivities coincide with many states lifting restrictions on the size of gatherings, mask requirements, and social distancing. 
In 1776, John Adams wrote that the Fourth of July holiday should be celebrated with “Guns, Bells, Bonfires and Illuminations.” That has certainly been the case over the past two centuries. However, there was a brief period in history where citizens and politicians lobbied to ban setting off fireworks due to concern that so many revelers were getting injured or dying from a mix of explosions and poorly shot toy guns. In 1903, there were 466 deaths and 4,449 injuries from holiday-related activities. The initiative to make July 4th a much more subdued affair was led by Charles Penneypacker, a lawyer from Pennsylvania, who argued that, “A spurious patriotism has brought a day of terror, misery, noise, destruction, and death.”
Pennypacker and others called for a “Safe and Sane Fourth,” and insisted that Fourth of July celebrations should focus on family, picnicking, trolley rides, and quiet reflection. The reform effort gained some traction for a while, and some cities and states banned the discharges of fireworks, firecrackers, gunpowder, cannons, guns, pistols, firearms, dynamite, or other explosives. President William Howard Taft even showed his support for the “Safe and Sane” movement in 1909 and hoped it would spread throughout the Union. Thankfully, our nation refused to let its birthday pass without fanfare and fireworks, and today, Americans are free to enjoy the traditional celebratory fireworks on July 4th. Consumers can purchase fireworks in some form in nearly every state and the District of Columbia. Massachusetts is the only state that completely bans all consumer fireworks, but that state does allow professional fireworks shows. 
With most COVID restrictions lifted and with an increasingly vaccinated population returning to pre-pandemic life, next week’s Fourth of July holiday looks to be a spectacular event across the country with a return of live concerts, parades, and, of course, fireworks. However you choose to celebrate the holiday, we hope you remain safe and have an opportunity to honor and celebrate the freedoms we cherish. 

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