3 Takeaways About the Current State of the Economy

By: Stacey Nickens

As we finish out August, many of us are packing in pool days and beach vacations while the weather is still nice. You may also be trying to maximize your fun in case the Delta variant continues to spread and forces us to stay home again. Indeed, headlines about the variant’s spread, inflation, and other concerns may have you worried about the state of economic recovery. However, the stock market still performed strongly in July, and earnings reports continue to bolster confidence in the broader economy. Recent Fed messaging has also been optimistic, suggesting the economy is healthier and more supported than some headlines would lead you to believe. So after a review of July’s stock market performance and economic metrics, what can we learn about the stock market and the economy as we head towards fall?

Remain focused on the bottom line, and know that the bottom line looks healthy and strong. Over half of the S&P 500 companies have reported their second-quarter earnings, and as of the end of July, the blended growth rate for these companies was around 85%. This growth rate puts the index’s companies on track for their best performance since the fourth quarter of 2009. In general, companies were beating earnings predictions by 17.2%, the fourth-best earnings beat on record, and were beating revenue predictions by 4.5%, the best revenue beat on record. These numbers underscore the financial health of some of the market’s leading companies, whose growth has been bolstered by pent-up demand and reopening momentum.

July’s stock market performance was also supported by these healthy earnings reports. The major indexes posted their sixth straight month of growth as high personal savings’ rates from fiscal stimulus, vaccine efficacy, easy financial conditions, fiscal support, and other bullish economic conditions continue to foster growth. Strength in mega-cap stocks such as Apple and Microsoft bolstered the technology sector’s performance in July and represented the larger theme of growth outperforming value during the month. Defensive market sectors also showed strength, with both utilities and REITs posting strong growth, and the healthcare sector was one of the month’s top performers thanks to gains among distributors, med-tech companies, and hospitals.

Expect continued support. As mentioned above, fiscal support has strengthened our economic recovery, and that support will likely continue through 2021. While the Fed recently said that we are closer to a tapering of support, Federal Reserve Chairman Jerome Powell stressed that the labor market had not yet hit full employment. Analysts believe the Fed will accordingly wait to reduce their fiscal support until at least the beginning of 2022.

Additional economic support may come in the form of a bipartisan infrastructure package making its way through Congress. If passed, this bill could provide significant funding to transportation, power, water, and broadband. Such infrastructure spending could give another boost to the economy moving forward.

Don’t let your fears run wild. While inflammatory headlines may have you feeling anxious, inflationary and Delta variant concerns may not be as pressing as they seem. The Fed continues to stress that inflationary pressures are likely temporary as a result of reopening momentum. Chairman Powell reiterated that inflationary concerns are largely being raised due to temporary pressures, such as supply chain and input price constraints.

Beyond inflation, the spread of the Delta variant has also served as fodder for fear mongering. However, many analysts believe that the variant does not pose a significant risk to economic recovery and stock market conditions. There is some talk that we are close to a peak in the variant’s spread, and the efficacy of the vaccine coupled with high vaccination rates among vulnerable populations seem to be serving as healthy antidotes against the variant’s impact.

With all that said, you may be able to head into August with some optimism about the stock market and the economy. As always, it is helpful to remember that opportunities abound as long as you look in the right places.