As we head into the final third of the year, here are some of the economic and financial topics I’m keeping an eye on.
On Friday, August 6, the Department of Labor (DoL) reported the largest gain in jobs in almost a year, with employers adding nearly a million jobs in July, driving unemployment to a 16-month low of 5.4%. Additional data indicated an upward revision in May and June figures, adding 119,000 more jobs than previously reported. Analysts were looking for a July number below 900,000 jobs. This may indicate that the US economy continues on the recovery track. Some analysts believe that 2021 may prove to be the strongest year for economic growth in the last forty years.
Driven by this positive news, the Dow closed well over 35,000, a new all-time high. Similarly, the S&P 500 closed at 4,461, also a record for the broader market. Equity markets are up significantly from their lows during the height of the pandemic in 2020, with the Dow up about 90% from its lows in the 18,000 range, and the S&P 500 up just over 99%.
Given the signs of recovery, some analysts think the Federal Reserve may be inching closer to a tighter money policy. However, as I have written previously, the gargantuan increase in the money supply, driven by the Fed’s efforts to maintain liquidity in the economy during the pandemic and the recovery, has the potential to rekindle inflation to levels higher than the Fed’s “Goldilocks zone.” In months to come, it will be important to closely observe the pace of the economic recovery and interest rates, staying alert for telltale signs of unruly inflation.
The Financial Markets
As mentioned above, the stock markets have performed strongly in recent weeks, with intermittent drops generated mostly by inflation worries. For investors desiring to hedge their portfolios against the possibility of higher inflation, holdings focused in financial stocks, utilities, basic energy materials, and telecommunications—or funds that concentrate in those areas, such as the Equities for Rising Rates exchange-traded fund (ETF), are worth serious consideration.
For fixed-income investors, it’s also important to keep inflation in view. Remember, interest rates are basically the “purchase price” of money, and higher inflation would likely push that price higher. To avoid getting trapped in holdings with low rates, fixed-income investors may wish to move toward shorter maturities, enabling them to capture higher rates as their holdings mature. Another good hedge for fixed-income investors is the US Treasury’s Series I bonds, which have a built-in inflation protection feature. I’ve written about them, and you can read my article by clicking here.
The Delta Variant
The continued spread of the delta variant COVID virus is still probably the biggest wild card in the financial and economic landscape, at present. While more and more of the country is vaccinated—which, according to the CDC and other sources, is still the best protection against severe illness and hospitalization—this variant continues to spread, primarily among unvaccinated portions of the population.
To this point, however, the spread of the variant seems to have had little effect on the economy, and few analysts believe that we are likely to see the type of drastic shutdowns in response to the delta variant that we did in the early days of the pandemic. After all, we have had over a year of experience with learning how to live with the virus and slow its spread. Increasing vaccination rates are helping, also. For example, according to the Transportation Safety Administration (TSA), more than 2 million travelers went through airports on Thursday, August 5—three times more than this time last year.
But if the delta variant continues to surge, or if the surge appears to be getting out of control, local, federal, and international governments could certainly re-impose harsher restrictions, which would almost certainly affect the economy and the financial markets. In the meantime, the best you can probably do is seriously consider getting vaccinated if you aren’t, and if you or someone you love is medically vulnerable, wear a mask when you’re indoors in public places.
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