The three major stock market indexes made nice gains in April. The S&P 500 and the Nasdaq each gained about 5% and the Dow gained 2.7%. April started with a bang-up jobs report of 916,000 new jobs in the month of March. It exceeded the expectation of 630,000 jobs and the January and February reports were revised higher, too. This is an encouraging sign of a recovering labor market.
Two factors in economic growth this year are the success of the vaccine roll-out and historically low interest rates. The greatest impact comes from the trillions of dollars in spending bills which are pumping the economy with money. The volume of stimulus programs in the last twelve months dwarfs anything done to thwart the Financial Crisis of 2008 – 2009. In 2010 – 2012 the government was working with billions of dollars. Ten years later we are talking trillions. Massive stimulus programs help support the economy in a crisis, but ultimately they drive prices higher which can lead to inflation. Moderate inflation is healthy for a growing economy but too much inflation hurts low paid workers and retirees on a fixed income. Prices rise and the purchasing power of the dollar falls. It costs more and more for the same goods and services.
The Federal Reserve continues to signal that it wants to see 2% annual inflation for healthy growth. In a recent release the Fed expressed the expectation of a pop to 2.4% inflation in 2021 and then a retreat to the 2.1% range by 2023. Messages from the Treasury and the Federal Reserve continue to assure Americans that inflation will not become a problem. You will frequently hear that inflation will be transitory – here for a short time and then it will back off to a sustainable level. The Federal Reserve’s main tool is setting short term interest rates. Currently set at zero, there is plenty of room to raise rates to counter inflation.
Historically the stock market is a good place to invest in times of rising prices because over time stocks grow faster than the rate of inflation. Moderate inflation is good for the stock market. If prices rise too fast, it is hard for businesses to maintain profitability which can result in declining stock prices.
We are watching the signals coming from the bond market. The yield on the 10 Year Treasury has backed off its recent high, but it is still supporting higher stock prices. The stock market continues to set all-time highs and at this level, we could experience some sideways movement while the market digests recent gains before moving higher. In the short term, we may even see a pullback or a correction. All of the indexes are extended after April’s run, so a pullback or a period of consolidation would not be a surprise.
In the intermediate to longer term, the market is showing strength, while some resistance is expected in the short term. Leadership continues to rotate to the value side of the stock market. Technology and growth stocks are not making much progress while materials, industrials, commodities, and financial stocks are putting in more new highs.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.