Weekly Stock Market Wrap & Guidance 6-28-21

DEWITT, Mich. - June 29, 2021 - PRLog -- Chugging Along

Despite the minor mid-June pullback spurred by concerns of a Fed policy shift, not much has changed in the financial markets or in the outlook for the economy. After moving sideways for most of the last two months, the S&P 500 hit a new high last week, the 33rd this year (an impressive 26% of all trading days in 2021)¹. This, in our view, is a reflection of a strong recovery and the easy financial conditions that have been in place for most of the past year. Last week's data provided further evidence that conditions remain favorable for equities, even as growth rates slow and the bar of expectations rises.

Private-sector activity is expanding at a robust pace, but shortages remain an issue

• The June preliminary Purchasing Managers' Index (PMI), a leading indicator of economic activity, showed that output across the private sector expanded at a historically elevated rate, even as the rate of expansion slowed slightly from the May record level (see graph below).
• In terms of sectoral breakdown, the manufacturing activity index expanded to a record high since data began in 2007, while the services index softened, pulling the composite index slightly lower. As the effects of the virus eventually wane and consumers return to their typical spending patterns, we expect the improvement in demand that started about a year ago to become more broad-based to include consumer-facing businesses. This rotation from spending on goods to spending on services will likely drive the next leg of the recovery.
• The survey data continue to show that firms are struggling to meet demand, suffering both raw-material and labor shortages, which is putting upward pressure on inflation. These pressures will likely persist in the near term but are expected to start easing in the second half of the year. Bottlenecks and shortages are at the heart of the inflation debate, with the market, for now, siding with the Fed's view that the price pressures are transitory and tied to the economic reopening.
• Consistent with the survey data that show favorable trends in the private-business sector, forward earnings continue to rise, supporting the market move to new highs. S&P 500 earnings are now expected to grow almost 40% in 2021 from 20% at the start of the year¹. The fact the earnings are rising at a faster pace than the market means that valuations have improved slightly, with the price-to-forward-earnings ratio falling to an eight-month low.

Source: 1. FactSet, Edward Jones calculations

Important Information:

This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.