JULY 2021

The Fed Changes Tone

• Global stocks gained 1.4% in June for the fifth positive month in a row bringing the YTD return to 12.6%.
• Returns were widespread but strongest in the US as the S&P 500 delivered 2.3% (15.3% YTD) followed by emerging markets’ 1.4% (7.6% YTD) and -1.4% (9.2% YTD) in non-US developed markets.
• Tech and growth stocks outperformed as the NASDAQ was 5.5% higher (12.9% YTD), US growth delivered 6.7% (13.1% YTD) vs. -1.0% for value (15.9% YTD), and information technology was the top sector in the S&P 500 (6.9%; 13.2%) as materials (-5.5%; 13.5%) and financials (-3.1%; 24.5%) lagged.
• Tech and growth outperformance was supported by a shift lower in yields as the 10-year Treasury dipped 13 bp in June to 1.47% but then fell another ~20 bp through July 8 to the lowest since February.
• Despite increasing and higher-than-expected inflation data along increasing signs of upward price pressure, both market and consumer-based inflation expectations have softened.
• Both the Fed and market view higher inflation as transitory and the Fed’s new rate guidance removed concerns that the central bank would let the economy run too hot before tightening policy.
• The ability for the labor market and supply side to meet the pick-up in demand remains key to the inflation outlook.
• The global growth recovery has become more uneven due to the varying levels of pent-up demand, savings, stimulus, Covid cases, and vaccine rollout success.