Market highlights

This year’s July 4th holiday finds the nation at the halfway point of the year with Q2 behind us and approximately 46.4% of the population vaccinated according to the CDC, only two-thirds of the distance to the 70% herd immunity desired by President Biden. The pace of vaccination has slowed dramatically, but curiously, people who are not vaccinated are more comfortable going out and participating in economic activity than those who are vaccinated. (Wall Street Journal, May 24, 2021.)

During June, the Dow Jones Industrial Average experienced a mid-month dip but recovered by month-end to be almost at par with May’s closing. The S&P 500, NASDAQ, and Russell 2000 all marked gains in June as the 10-year Treasuries faltered and extended a slide that began in April. In June, gold lost what it gained in May, crude oil rose into the $60 – $70 per barrel range, and retail gasoline increased over +6 cents per gallon. Overseas, European markets gained slightly while Asian markets all showed a monthly decline, though mild in Shanghai compared with Hong Kong and Tokyo.

 
 

U.S. Markets

The Dow Jones Industrial Average completed Q2 at 34,502 with a minor loss of -27 points but holding a YTD of +11.5%. Showing a nice increase of +93.5 points during June was the S&P 500, closing at 4,297 and a +13% YTD. Getting back on track was the NASDAQ, jumping +756 points for a month-end close of 14,503 and a pleasing YTD of +11%. Still wearing the YTD blue ribbon with +14.5%, the Russell 2000 added +42 points to finish the quarter at 2,310.

 

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European and Asian Markets

The United Kingdom’s FTSE index showed a meager +15 point increase, ending the first half of the year at 7,037 with the same YTD as last month at +8%. The German DAX was an identical twin, gaining only +12 points and finishing at 15,531 with a 12% YTD, the same as at the end of May. Showing only the slightest increase beyond the FTSE and DAX, France’s CAC index increased by +23 points to 6,507 and a YTD of +14.7%, barely over its May bar. Asian markets lost ground during June but to varying degrees. The Shanghai Stock Exchange lost only -9 points, drifting to 3,591 with a YTD of +3% while the Hang Seng Index of Hong Kong dropped -296 points to 28,828, shaving -1% off its May YTD to +5.5% in June. The Nikkei Index was hurt the most, losing -390 points and all its gains from May when it closed June’s door at 28,759 but still in the YTD black at +4%.

News from China

The People’s Republic of China celebrated the 100th anniversary of the Chinese Communist Party on July 1 as President Xi Jinping “asserted that China would never have achieved its present-day prosperity and power without the party’s struggles against foreign oppression and domestic exploitation.” (NY Times.)

Despite the celebrations of China’s new-found economic power, there are potential drawbacks to further economic growth: “Its hundreds of millions of rural citizens—who comprise roughly 7% of all humanity—suffer from underemployment, a lack of education, and little opportunity to either participate in or contribute to the country’s middle-class boom. The problem could be knotty enough to prevent China from entering the ranks of high-income countries anytime soon.” (The Washington Quarterly, Stanford University, June 17, 2021.)

 

Fixed Income

The Federal Open Market Committee met on June 15 – 16 at its regularly scheduled meeting. Noting the progress of vaccinations, the Committee indicated a continuance of its present policy of “wait and see”. Among the highlights in the minutes are the following: “Amid this progress (vaccinations) indicators of economic activity and employment have strengthened. …   Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well-anchored at 2 percent.” (FOMC minutes, June 16, 2021.)

10-Year Treasuries: According to MarketWatch, Inc., a subsidiary of Dow Jones & Company, “A key market signal on inflation has taken a dip ahead of the second half of 2021. When the benchmark 10-year Treasury rate quickly climbed to 1.7% in March, Wall Street went on high alert, worrying about the Federal Reserve’s potential to go overboard with its support for the economy during the pandemic, while risking an inflation hangover of the likes not seen since the 1970s. Now, three months later, the 10-year yield has tumbled to 1.44% as of Wednesday, but also resisting the climb toward 2% that many strategists penciled in for year-end.

“What does that mean for inflation expectations? “The 10-year Treasury is signaling that we are not going to get sustained inflation above 2%,” Kathy Jones, chief fixed-income strategist at Schwab Center for Financial Research, told MarketWatch. “The worry is that fiscal stimulus may be fading too soon and the economy is not really getting back to full growth and labor-market participation,” Jones said. “That’s where we are.”

“I don’t think the market is saying there isn’t a spike in inflation,” said Eric Souza, senior portfolio manager at SVB Asset Management. “There is higher inflation right now. There is no doubt about it. But will these increases persist? I feel the answer is ‘no’ when you think historically where prices have been,” he told MarketWatch, pointing to globalization and advancements in technology that in the past have kept major price increases at bay.”

 

Commodities

Comex gold fell -$142 per ounce to $1,762, reminiscent of its April 30 close of $1,765, negating all the gains made during May. “Gold dropped sharply and the dollar rose Thursday after the Federal Reserve signaled it may raise interest rates sooner than expected. Gold futures declined 4.5%, the largest drop in over 10 months. That took gold down to $1,777.80 a troy ounce, its lowest since early May.” (Wall Street Journal, June 17, 2021.)

West Texas Intermediate Crude oil continued to increase for the third consecutive month, ending June at $73.50 per barrel, an increase of +$6.87 for the month and a YTD of +34%. A retail gallon of regular gasoline also increased, nationally averaging $3.11, an increase of +6.6 cents and +31% YTD.

 

U.S. Economy

GDP: The Bureau of Economic Analysis reported on June 24 that “Real gross domestic product (GDP) increased at an annual rate of 6.4 percent in the first quarter of 2021, according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 4.3 percent. The “third” estimate of GDP released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was also 6.4 percent.”

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Job Growth: The employment situation was reported on June 4, 2021, for data based on May. The US Bureau of Labor Statistics stated “Total nonfarm payroll employment rose by 559,000 in May, and the unemployment rate declined by 0.3 percentage point to 5.8 percent. Notable job gains occurred in leisure and hospitality, in public and private education, and in health care and social assistance. In May, the unemployment rate declined by 0.3 percentage points to 5.8 percent, and the number of unemployed persons fell by 496,000 to 9.3 million. These measures are down considerably from their recent highs in April 2020 but remain well above their levels prior to the coronavirus (COVID-19) pandemic (3.5 percent and 5.7 million, respectively, in February 2020).

“The labor force participation rate was little changed at 61.6 percent in May and has remained within a narrow range of 61.4 percent to 61.7 percent since June 2020. The participation rate is 1.7 percentage points lower than in February 2020. The employment-population ratio, at 58.0 percent, was also little changed in May but is up by 0.6 percentage points since December 2020. However, this measure is 3.1 percentage points below its February 2020 level. The number of persons employed part-time for economic reasons was essentially unchanged at 5.3 million in May but is 873,000 higher than in February 2020. These individuals, who would have preferred full-time employment, were working part-time because their hours had been reduced or they were unable to find full-time jobs.

“In May, 16.6 percent of employed persons teleworked because of the coronavirus pandemic, down from 18.3 percent in the prior month. These data refer to employed persons who teleworked or worked at home for pay at some point in the last 4 weeks specifically because of the pandemic.”

New Home Sales: Reuters reported the following on June 23: “Sales of new U.S. single-family homes fell to a one-year low in May as the median price of newly built houses soared amid expensive raw materials, including framing lumber. The second straight monthly decline in sales reported by the Commerce Department on Wednesday was the latest indication that the tailwind from the COVID-19 pandemic could be subsiding. Single-family housing benefited from migration from cities as millions of Americans sought more spacious accommodations for home offices and schooling during the pandemic.

"New home sales along with existing home sales suggest home buying activity is past its peak," said Chris Rupkey, chief economist at FWDBONDS in New York. "We don't know what is going to happen when the stay-at-home economy shifts to going back to the office." New home sales dropped 5.9% to a seasonally adjusted annual rate of 769,000 units last month, the lowest level since May 2020. April's sales pace was revised down to 817,000 units from the previously reported 863,000 units. The median new house price jumped 18.1% from a year earlier to $374,400 in May. Last month's decline was concentrated in the populous South, where sales tumbled 14.5%. Sales, however, rose in the Northeast and West. They were unchanged in the Midwest.

“Builders have failed to take advantage of the inventory squeeze because of expensive lumber and shortages of other raw materials. Though lumber prices have eased off record highs, they remain exorbitant, substantially adding to the cost of newly built homes. At the same time, the supply gap is boosting competition for available homes.

“New home sales last month were concentrated in the $200,000 – $749,000 price range. Sales below the $200,000 price bracket, the sought-after segment of the market, accounted for only 2% of transactions last month. There were 330,000 new homes on the market last month, up from 315,000 in April. At May's sales pace it would take 5.1 months to clear the supply of houses on the market, up from 4.6 months in April. About 76% of homes sold last month were either under construction or yet to be built.”

Existing Housing Sales: “Existing-home sales decreased for a fourth straight month in May, according to the National Association of Realtors®. Only one major U.S. region recorded a month-over-month increase, while the other three regions saw sales decline. However, each of the four areas again registered double-digit year-over-year gains.

"Home sales fell moderately in May and are now approaching pre-pandemic activity," said Lawrence Yun, NAR's chief economist. "Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market. The market's outlook, however, is encouraging. Supply is expected to improve, which will give buyers more options and help tamp down record-high asking prices for existing homes."

“The median existing-home price for all housing types in May was $350,300, up 23.6% from May 2020 ($283,500), as every region registered price increases. This is a record high and marks 111 straight months of year-over-year gains since March 2012. Total housing inventory at the end of May amounted to 1.23 million units, up 7.0% from April's inventory and down 20.6% from one year ago (1.55 million). Unsold inventory sits at a 2.5-month supply at the present sales pace, marginally up from April's 2.4-month supply but down from 4.6-months in May 2020.

“Properties typically remained on the market for 17 days in May, unchanged from April and down from 26 days in May 2020. Eighty-nine percent of the homes sold in May 2021 were on the market for less than a month.
First-time buyers were responsible for 31% of sales in May, also even with April but down from 34% in May 2020.”

Manufacturing: “Growth in U.S. manufacturing slowed slightly in June, as supply chain problems persist and businesses say they are still struggling to find workers to keep up with demand. The Institute for Supply Management (ISM), a trade group of purchasing managers, said Thursday that its index of manufacturing activity ticked down in June to a reading of 60.6 from 61.2 in May. Any reading above 50 indicates manufacturing is expanding. June was the 13th consecutive month manufacturing has grown after contracting in April 2020, when coronavirus fears triggered business shutdowns across the country.

“Production, which increased to a reading of 60.8 last month, might have seen an even stronger bump if not for raw materials shortages and labor issues, including absenteeism and turnover. The employment index dipped into contraction territory, falling to 49.9 in June from 50.9 in May. An overwhelming majority of panelists surveyed said their companies are hiring or attempting to hire, with more than a third of them having difficulty filling positions. Panelists said employee turnover due to “wage dynamics” was a problem — in other words, workers leaving jobs for better pay. “Lack of labor is killing us,” said one respondent.” On top of demand, ongoing supply chain issues and material shortages are driving prices up to levels not seen in more than 40 years.

“The ISM price index registered 92.1, jumping 4.1 points from the May reading of 88, as raw materials prices increased for the 13th consecutive month. It’s the index’s highest level since July 1979 when it hit 93.1. “Virtually all basic and intermediate manufacturing materials are experiencing price increases as a result of product scarcity and the dynamics of supply and demand, with an increasing number of panelists reporting higher prices compared to May,” said Timothy Fiore, chair of the ISM manufacturing survey committee. (Washington Post, July 1, 2021.)

Exports: With information released on June 8, 2021, the Bureau of Economic Analysis (BEA) reported the latest data about exports, which is for April 2021: “The goods and services deficit was $68.9 billion in April, down $6.1 billion from $75.0 billion in March, revised. April exports were $205.0 billion, $2.3 billion more than March exports. The April decrease in the goods and services deficit reflected a decrease in the goods deficit of $6.2 billion to $86.7 billion and a decrease in the services surplus of $0.1 billion to $17.8 billion.
Year-to-date, the goods and services deficit increased $94.5 billion, or 50.5 percent, from the same period in 2020. Exports increased $42.0 billion or 5.6 percent. Exports of goods increased $1.6 billion to $145.3 billion in April.”

unnamed-Jul-06-2021-07-29-26-31-PMImports: The Census Bureau reported the following information on June 8 regarding imports for April 2021: “Imports of goods decreased $4.5 billion to $232.0 billion in April. Consumer goods decreased by $2.6 billion. Other textile apparel and household goods decreased by $0.9 billion. Toys, games, and sporting goods decreased by $0.7 billion. Household appliances decreased by $0.7 billion. Cell phones and other household goods increased by $1.7 billion. Automotive vehicles, parts, and engines decreased $1.1 billion. Automotive parts and accessories decreased by $0.7 billion. Passenger cars decreased by $0.5 billion. Imports of services increased $0.7 billion to $41.9 billion in April, with travel increased $0.3 billion, and transport increasing $0.2 billion.”

Retail Sales: As published by the US Census Bureau on June 15, “Advance estimates of U.S. retail and food services sales for May 2021, adjusted, were $620.2 billion, a decrease of 1.3% from the previous month, but 28.1 percent above May 2020. Total sales for March 2021 through May 2021 period were up 36.2 percent from the same period a year ago. Retail trade sales were down 1.7 percent from April 2021, but up 24.4 percent above last year. Clothing and clothing accessories stores were up 200.3 percent from May 2020, while food services and drinking places were up 70.6 percent from last
year.”

Also on June 15, Bloomberg added: “U.S. retail sales declined in May, after a stimulus-related splurge in the prior two months, suggesting consumers are starting to shift more of their spending to services as the economy reopens. The total value of retail purchases fell 1.3% in May following an upwardly revised 0.9% gain in April, Commerce Department figures showed Tuesday.
For the last year, demand for goods has been propped up by elevated savings supported by fiscal stimulus, bringing total retail sales well above pre-pandemic levels. The May decline in retail sales suggests that as travel picks up and entertainment venues reopen, spending on goods is starting to moderate.

“The total value of retail sales was $620.2 billion in May, well above the almost $526 billion in February 2020, before the pandemic. While consumer spending is expected to continue strengthening, the pace will probably moderate as enhanced unemployment benefits expire and stimulus checks are spent. A sustained pickup in inflation may also cause consumers to limit discretionary expenditures.”

Consumer Prices: “Consumer prices for May accelerated at their fastest pace in nearly 13 years as inflation pressures continued to build in the U.S. economy, the Labor Department reported Thursday. The consumer price index, which represents a basket including food, energy, groceries, housing costs, and sales across a spectrum of goods, rose 5% from a year earlier. Economists surveyed by Dow Jones had been expecting a gain of 4.7%.
The reading represented the biggest CPI gain since the 5.3% increase in August 2008, just before the financial crisis sent the U.S. spiraling into the worst recession since the Great Depression.

“Used cars and truck prices continued their climb higher, rising 7.3% on the month and 29.7% for the past 12 months. The new vehicles index increased 1.6%, its biggest single-month gain since October 2009, and was up 3.3% for the 12-month period, the highest move since November 2011. However, the energy index was about flat for the month despite the huge runup in gasoline prices this year, while the food index repeated its April rise of 0.4%. The gasoline index is up 56.2% over the past year, part of an overall 28.5% increase in energy during the period. Food prices have remained comparatively tame, up 2.2% for the 12-month period. A separate gauge that excludes volatile food and energy prices increased 3.8%, vs the Dow Jones estimate of 3.5% for so-called core inflation. That was the fastest pace since May 1992.” (CNBC, June 10.)

Producer Price Index (PPI): A leading economic indicator for foretelling future prices by measuring prices paid by producers of goods and services, the Bureau of Labor Statistics reported on June 15 that “The Producer Price Index for final demand increased 0.8 percent in May, as prices for final demand goods rose 1.5 percent and the index for final demand services moved up 0.6 percent. The final demand index advanced 6.6 percent for the 12 months ended in May.” 

Consumer Price Index (PPI): Also a leading economic indicator, one that gauges prices paid by consumers, data was reported by the Bureau of Labor Statistics on June 10: “In May, the Consumer Price Index for All Urban Consumers rose 0.6 percent (seasonally adjusted); rising 5.0 percent over the last 12 months (not seasonally adjusted). The index for all items less food and energy increased 0.7 percent in May; up 3.8 percent over the year.”

Unemployment: “Jobless claims for the week ended June 5 came in at 376,000. The estimate was 370,000. The total still marked the lowest of the pandemic era.” (CNBC, June 10.)

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Consumer Sentiment: “The Conference Board Consumer Confidence Index® improved further in June, following gains in each of the previous four months. The Index now stands at 127.3 (1985=100), up from 120.0 (an upward revision) in May. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—rose from 148.7 to 157.7. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—improved to 107.0, up from 100.9 last month.

“Consumer confidence increased in June and is currently at its highest level since the onset of the pandemic’s first surge in March 2020,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions improved again, suggesting economic growth has strengthened further in Q2. Consumers’ short-term optimism rebounded, buoyed by expectations that business conditions and their own financial prospects will continue improving in the months ahead. While short-term inflation expectations increased, this had little impact on consumers’ confidence or purchasing intentions. In fact, the proportion of consumers planning to purchase homes, automobiles, and major appliances all rose—a sign that consumer spending will continue to support economic growth in the short term. Vacation intentions also rose, reflecting a continued increase in spending on services.” (The Conference Board, June 29, 2021.)

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Curious News: The Economist reported in an article on June 26 that when assessing the Chinese Communist Party’s likelihood of remaining in power forever, it “suffers from factionalism, disloyalty, and ideological lassitude. … The moment of greatest instability is likely to be the succession” following President Xi Jinping. No one knows who will come after Mr. Xi, or even what rules will govern the transition. When he scrapped presidential term limits in 2018, he signaled that he wants to cling to power indefinitely. But that may make the eventual transfer only more unstable. Although peril for the party will not necessarily lead to the enlightened rule that freedom-lovers desire, at some point even this Chinese dynasty will end.”

Final Reflections

The delicious days of summer began with an unexpected heatwave almost hot enough to cook everybody’s Fourth of July burgers without the barbecue. Hopefully, your summer will be filled with the normal joys of reflection, relaxation, and renewal so the second half of 2021 can bring all of us closer to the desired purpose of showing kindness and compassion for each other. Everyone at Carlton Wealth wishes you and your family a wonderful summer of peace and prosperity.

 

Joseph Maas

Information contained herein is based on data obtained from sources believed to be reliable, however, such information has not been verified by Carlton Financial Group, LLC d/b/a Carlton Wealth or Synergy Financial Management, LLC. The information provided has been prepared and distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy or an offer of advisory services.

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