The second quarter ended on a positive note, with the major market indexes posting healthy gains for the first half of the year. The spring’s worries over inflation have begun to subside and are slowly being replaced by concerns over Fed policy, jobs growth, and taxes. Although the unemployment rate now sits at a healthy 5.9%, this number does not tell the entire story. The United States currently has 6.8 million fewer workers than before the pandemic. The economic recovery won’t be complete until overall employment improves, and these missing jobs are created and filled. Fortunately, the Fed is well aware of this, and is committed to keeping rates low to support the economy and fill the jobs gap.
The Biden Administration continues to press for higher taxes along with higher government spending. Higher taxes could weigh on economic growth, while prudent infrastructure spending would be a plus for long-term growth. In the political realm, tax hikes seem to be taking a back seat, while compromises to increase spending have a higher priority. Continued record-low interest rates on Federal government debt shows that the markets are not concerned by the prospect for higher Federal spending over the next few years.
Consumer spending is driving the recovery. Corporate earnings and jobs will follow.
The recovery in the economy has been driven by consumer spending. In a remarkable turn of events, last year US consumers used the opportunity of the pandemic to save more and pay down debt. The average American’s finances are now in better shape than they have been in decades. This means that consumer spending is very likely to continue at its current pace, and quite possibly accelerate into the end of the year.
As students of history, we know that fundamentals drive the markets. When people are working and consumers are spending, the economy will grow. A growing economy leads to growing corporate earnings. In the short run, the markets can experience volatility, but in the long run increasing earnings leads to higher prices for stocks and larger dividends for shareholders.
In the long run, fundamentals drive the market.
History tells us to expect a market correction. We know the market averages one substantial drop every year. After that drop happens, the market usually recovers quickly. We also know that it is impossible to predict when corrections will happen. If you sell stocks because “the market is too high”, it is very possible you will simply miss out on further gains.
Looking forward, the right strategy for long-term investors is the same strategy that has worked well time after time. Staying invested in high-quality American companies is still the best way to build and protect wealth.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer