Week in Review: July 19, 2021

Equity markets ended the week lower on concerns about the potential impact of the rapidly spreading Delta coronavirus variant, higher inflation, and the growing realization that economic growth is likely near, or already at peak levels and set to decelerate over the remainder of the year. That doesn’t mean the economy is headed for recession. Most likely, growth will revert towards its pre-pandemic pace over the remainder of 2021 and into 2022.

Whatever concerns equity investors may currently have about higher inflation, bond markets appear to be rather sanguine, as evidenced by the 10-year Treasury yield closing the week at 1.31%. That would suggest that bond markets are generally aligned with the Fed’s outlook and ours, that the current spike in prices will prove to be transitory, and economic growth will moderate moving forward.

Speaking before Congress, Federal Reserve Chairman Powell largely reiterated his previous positions on inflation and monetary policy. During two days of testimony, Powell acknowledged that there is “a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%.” Powell noted, however, that the Fed is watching inflation closely and would “absolutely change our policy,” if rising costs were to deviate from expectations.

Second quarter earnings season is underway, with nearly 10% of S&P 500 companies having reported. Thus far, 85% of reporting companies have exceeded expectations. Aided by a 30% decline in 2Q20 earnings, 2Q21 earnings are expected to increase 69% according to industry group Factset.