July 2021 – Third Quarter Thoughts

As we move into July, a path to normalcy is coming quickly with stadiums allowing full capacity, restaurants filling up, and summer vacations in full swing -as evidenced by the latest hotel occupancy and airline flight data.

The U.S. economy continues to recover quickly, and equity markets continue to grind higher with the S&P 500 Index recently rising above the lower end of our 2021 year-end target of 4,300.

All positive news of course, but companies are having trouble finding workers, while higher inflation has many wondering whether the Federal Reserve is behind the curve and will need to quickly tighten monetary policy to stave off inflation. Add in higher taxes and the likelihood of more deficit spending on the way, our list of market concerns heading into the third quarter isn’t getting any smaller (but does it ever)?

Given the unprecedented spike in consumer demand, in addition to massive monetary and fiscal stimulus, worries over the economy potentially overheating are growing louder. As I mentioned in our May note, the Consumer Price Index (CPI) for April sparked much of this worry, with the core reading rising 0.8% month over month, being the hottest since the early 1980s. You are likely seeing higher prices when you go to the grocery store or filling up your car, making this a real concern. Hiring problems and supply chain issues are adding to the inflation pressures on top of the pent-up demand coming through as the economy fully reopens.

Although these concerns are real, we still believe that longer-term inflation should come back to trend. Technology, globalization, the Amazon effect, increased productivity and efficiency, automation, and high debt (which puts downward pressure on inflation) are among the major structural forces that have put a lid on inflation in the past decade —and will likely continue to do so. The demand/supply equation fueling this will come back into equilibrium.

Tactically speaking from a portfolio management lens, we are seeing fewer high conviction opportunities, and believe current equity valuations to be generally rich in the short run. We think it makes sense to be patient and focus on maintaining liquidity and flexibility within portfolios to respond to events and opportunities as they present themselves.

Please keep in mind that historically, the next several months are the most volatile of the year for markets and we would not be surprised to see some upcoming market turbulence. In general, we continue to favor stocks over bonds in portfolios (as appropriate) and should there be any downside volatility, we suggest using the weakness to buy stocks at cheaper prices given the still favorable economic backdrop.

We wish you and your family an enjoyable Friday evening and a wonderful 4th of July weekend!

As always, please reach out to us with any questions or comments you may have regarding your specific situation.

Jaran Day Chief Investment Officer

Griffin Dalrymple, CFP®, Chief Strategy Officer