The month of August brought gains to stock investors. Most broad measures of equities increased by at least one percent. Domestic large-cap stocks, international large-cap stocks, US small cap stocks, and international small cap stocks all posted returns between 1.7% and 3.0% for the month.
The overall US bond market declined slightly by -0.2% on news from the Federal Reserve. Stating that the US economy has made substantial progress towards the Federal Reserve’s employment and inflation goals, Chairman Powell said the need for asset purchases is fading, and accordingly, the Federal Reserve would likely begin to taper their asset purchases this year. Just as importantly, the Fed announced they would also be very patient before raising their policy rate. While the planned reduction in bond purchases should reduce demand for bonds and cause interest rates to rise, Powell’s speech led to the opposite: a short-lived fall in long-term interest rates. Investors seemed to focus more on the probability of a longer period of low short-term interest rates than on a reduction in bond purchases.
One reason for a potential extension of the zero-interest rate policy is delayed growth in the US economy. As we mentioned last month, the second quarter GDP growth rate was several percentage points less than originally forecast. That slower growth meant that full economic normalization pushes further out into the future. Since then, additional reports of supply line disruptions have been published. The Wall Street Journal reported that many factories are adjusting their production lines so they can partially manufacture products and store them for final assembly once missing components arrive. The industrial company Honeywell reported missing out on at least $100 million in sales due to input shortages, and some domestic auto manufacturing plants have gone idle while waiting for delayed semiconductor shipments.
In addition to these supply-chain disruptions, there are other factors constraining economic growth. Positive COVID-19 cases are back to where they were last November, triggering new local restrictions and prodding some people to cancel their travel plans. Airline stocks, which had previously been up nearly 30% this year, are now trading close to their December 2020 levels.
Slower growth isn’t necessarily a bad outcome, but the causes underscore the importance of mitigating the spread of the Delta and other variants. Curbing them will address not only a human tragedy, but also will allow the economy to take more steps forward. As the world continues to grapple with the human and economic recovery from the virus, the point of normalization gets pushed back. Not only does this leave us lingering in recovery mode economically, but it also delays knowing what our post-pandemic normal will be. Our job will be to gather the evidence an position your portfolio accordingly as we move into a new cycle.