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Weekly Market Update for June 25, 2021

by JM Hanley

It was a relatively quiet week on Wall Street. After a Fed-induced downturn last week, markets more than made up the lost ground. Value stocks retraced most of their losses, while technology and other growth industries surged ahead. The S&P finished the week up 2.7%; the Nasdaq was up 2.4%.

A barrage of commentary from Federal Reserve board members softened the hawkish tone the central bank struck last week. While the Fed seems divided on the matter, a majority seems committed to a patient approach to rate increases. The Fed also released the results of its “stress tests” this week. All of the 23 “too big to fail” banks passed, which means they have sufficient reserves to survive a downturn. Banks may now accelerate the pace at which they return cash to shareholders via buybacks.

Economic data was largely consistent with the Fed’s theory that high inflation is transitory, linked to the rapid reopening of the economy. PCE, a tracker of consumer spending and a favored inflation metric of the Fed, came in lower than expected. Some think it may have peaked. Categories that are sensitive to virus restrictions have improved substantially but are still far below their pre-covid peak. Even home sales were something of a disappointment. Sales of existing homes declined, in part because supply is so constrained. But the sale of new homes did as well, and that seems correlated to recent spike in prices. Two measures of long-term household and business investment were also weak. And jobless claims declined by less than expected.

The Administration and a bipartisan group of senators have apparently reached an agreement on infrastructure legislation worth $579 billion over eight years. That’s relatively modest given the size of the economy and the extent of federal spending. The bill doesn’t include any tax increases to pay for the spending, and its passage through Congress already looks imperiled. Investors have long been skeptical of the bipartisan negotiations. They expect that more significant measures – significant new spending commitments on a range of priorities, partially paid for with an increase in the corporate tax rate and other taxes – will come in a bill Democrats attempt to pass on their own later this year.

Next week will mark the end of the second quarter. Companies will begin to report earnings in the middle of next month. In the meantime, investors will be waiting for next Friday’s June jobs report. May and April’s numbers were disappointing, and if that continues, the forecasted pace of recovery may be revised.   Data on wage gains will be another indicator of inflationary pressures.

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