May 27 Weekly Market Update

The market got off to a strong start on Monday and then proceeded to level off in the days that followed. Stocks initially performed well after some dovish comments from Federal Reserve officials but cooled thereafter on the heels of some soft housing data.

A series of comments were made earlier this week from Federal Reserve Governor Lael Brainard, Atlanta Fed President Raphael Bostic, and others that somewhat allayed investors’ inflation fears. The unifying theme was that the recent rise in prices is due to the reopening of the economy and thus a temporary event that should not have long-lasting ramifications. These Fed officials furthermore stated that in the near-term they would not be surprised to see some inflation due to supply chain issues and the unleashing of pent-up consumer demand. This, however, is not expected to persist.

On the housing front, it was announced that sales of new U.S. homes declined more than expected in April. A recent spike in material costs, notably lumber, contributed to higher home prices which thereby dampened demand in what had been a rather robust housing market up to this point. While higher housing prices may put a lid on near-term demand, mortgage rates are near historic lows and residential construction backlogs appear to be strong. So, despite this short-term hiccup, the housing market may still have room to run in the months ahead.

There’s an old saying that “nothing cures high prices like high prices.” When short-term inflation becomes a bit untenable in various pockets of the economy, two things tend to happen. First, consumers slow their consumption, meaning demand slows. Second, and arguably more importantly, there tends to be a supply response. So, as we think of some of the areas of the market where inflation has reared its ugly head, that includes disparate industries such as oil, lumber, and semiconductors, just to name a few. As the prices at the pump rise due to renewed demand, oil producers will eventually ramp up production. As housing construction continues to grow, mills will crank out more lumber. Semiconductor fabricators will also begin to increase production and bottle-necked shipping lines will eventually open up. Coming full circle, there is some inflation in the system right now for all the reasons one might imagine. However, good old-fashioned supply and demand dynamics should ultimately win the day, causing pricing trends to eventually revert to some form of normalcy.

Be safe and be well.

Market comments are based on the S&P 500 index which is unmanaged and cannot be directly invested into. Past performance is no guarantee of future results. Investing involves risk and the potential to lose principal.

The information provided is for general informational and educational purposes only and is not a recommendation of any kind or investment advice.

Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed.