This week, CIO Tom Weary, CFA®️, starts things off by sharing Target Corporation’s recently announced dividend hike. He also covers the stock market—which recently hit record highs—as well as investor predictions for the months ahead. Tom then discusses this week’s big headline regarding inflation (as measured by the CPI) before closing with updates on the labor market.


Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. We didn’t have any of our companies report earnings this week, although we did hear from Target, a holding in both Core and Defensive Portfolios, announcing on Wednesday that they plan on boosting their dividend by over 30%, which is sign of confidence in the future and always welcome news to investors. We’ll take a look at the week’s major headline regarding inflation, and I want to delve into the dynamics of the labor force, but first let’s start by checking in on the stock market.

The stock market was hitting record highs this week, but it seemed to have all the excitement of watching paint dry, at least in the broader market. The fireworks appear to be limited to the fringe speculative areas, such as the so-called meme stocks and cryptocurrencies. As you can see in this first chart, the S&P 500 Index has basically been moving sideways for a couple of months now. Some see this as a consolidation before the market moves solidly higher, while others worry that the market is forming a major top before rolling over in a huge decline. So, will the market mover higher or lower in coming months? Yes, it will. We don’t know which and we can’t know which. The future isn’t predetermined and unfolding according to some cosmic plan. But we can observe that things appear to be getting very quiet, with the VIX, or Volatility Index, know as Wall Street’s Fear Index, hitting new pandemic lows as we see in this next chart. Investor complacency is usually a problem, so don’t be surprised if we get a normal, healthy burst of market volatility during the summer. That would be typical, and we will try to take advantage of it if it happens.

The big economic headline this week was the announcement Thursday of May’s Consumer Price Index coming in at 5%, a level not seen in over a decade, as we can see in this first chart. When we strip out volatile food and energy prices, Core CPI came in at a less scary 3.8%, but as we can clearly see in this second chart, Core CPI has moved solidly above its pre-pandemic trendline after the deflationary impact of the shutting down the economy due to COVID. Is this surge a cause for concern? The Federal Reserve is sticking with their story that this bump in inflation is only transitory and will return to its trendline before long. The Biden Administration is touting the inflation bump as proof of the economic rebound. And bond investors don’t seem very worried, and they are usually Nervous Nellies when it comes to inflation. As you can see in this next chart, the yield on the benchmark 10-year Treasury bond initially rose on the CPI headline, but then collapsed once investors had time to look through the data. And this next chart shows that the yield curve has been flattening recently, which is usually taken as a sign that investors are anticipating an economic slowdown. While we are in the midst of an economic surge which may see double-digit GDP growth this quarter, are bond investors already looking through the current boom to a return to tortoise-like economic growth? It looks like it.

So, why might investors be expecting slower economic growth ahead, after the sugar high of historic monetary and fiscal stimulus thanks to the pandemic? Well, remember that potential GDP growth is merely growth in the labor force plus labor force productivity. As this first chart shows, the American labor force took a huge hit from the pandemic and is still about 6 million jobs short of its pre-pandemic trendline. Fortunately, as the Job Openings Survey released this week showed, employers are eager to fill that gap, with a record 9.3 million job openings in April, a million more than expected. But the longer-term trends aren’t so favorable. As you can see in this next chart, the Prime Age population in the U.S., or people between the ages of 25 and 54, hasn’t grown in over a decade. Why that is important is illustrated in this next chart. Between 1950 and 2015, growth in the labor force accounted for fully half of GDP growth, with productivity increases accounting for the other half. And as this last chart indicates, the outlook for labor force growth is pretty bleak, never getting above half a percent in the next 40 years. And don’t expect that a sudden boom in worker productivity is going to bail us out. Productivity gains are hard to come by in a service-based economy. No, it seems more likely that after the stimulus surge passes, we will probably settle back down to very moderate economic growth and tame inflation. Yet, that can be a very favorable environment for investors, as we witnessed in the past decade.

So, what does it all mean? The stock market crept slowly to new highs on the back of a recently concluded and surprisingly successful earnings reporting season. Your companies are finding ways to innovate and grow, and they are sharing the wealth with investors, as we saw with Target’s announcement of a huge dividend hike. They will need to continue to do so, for as we discussed, once the effect of the current monetary and fiscal stimulus passes, we are likely to settle right back down to very muted growth given the demographic profile not only of the U.S. but also most major economies. We’ll stay on top of the latest developments on your behalf. So, please, sit back, relax, and join us again next week for the RFA Weekly Market Update.

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