Market Recap: May 2021
Global financial markets generally climbed higher in the month of May, but at a more subdued rate than earlier in the year. Continued progress on the vaccination front and the subsequent reopening of communities provided optimism for sustained economic recovery. However, concerns that inflation could surge serving as a barrier to a fully rehabilitated economy resulted in more modest returns this month. Sectors such as energy and financials were among the leading sectors in the month, fueled by higher commodity prices and a steeper yield curve. Vaccination efforts continue to improve in many nations and the recently announced European Union COVID-19 recovery fund further bolstered investor optimism. Additionally, a falling U.S. dollar benefitted foreign equity performance. Potentially intrusive regulation pressured large Chinese technology stocks while many developing nations continue to struggle with elevated cases of COVID-19 and slow vaccine distribution.
A Few Thoughts on Inflation
U.S. inflation has been a hot topic this year, and rightfully so, as historic fiscal stimulus programs, ultra-accommodative monetary policy and an economy moving ever closer to self-sustaining status nudged inflation expectations higher. The most conspicuous evidence on this front comes in the form of the U.S. Bureau of Labor Statistics’ May report depicting a 5.0% year-over-year increase in its Consumer Price Index (CPI); the largest increase since 2008. The less volatile Core CPI measure, which excludes food and energy components, also rose a noteworthy 3.8% over the same period. While these figures certainly capture our attention and scrutiny, much of the increase over the last year can be attributed to a low base effect, as recent data solidifies from the unsustainably low levels witnessed in the spring of 2020 following the essentially complete shutdown of the economy in response to the COVID-19 pandemic. Commodity prices plummeted in the immediate wake of the pandemic as consumers stayed home and businesses closed, but they have staged a steadfast recovery since then in anticipation of a global recovery. Supply chain disruptions (blocked canals, pipeline hacks, etc.) also impacted prices across industries but are beginning to show signs of being addressed and alleviated. Charles Schwab recently noted that shipping from Shanghai to Los Angeles has been taking more than double the typical 14-day journey, ports are now showing less backlog and the Baltic Dry Freight Index (which measures bulk material prices across popular global shipping routes) has moved off its peak earlier in the month.
U.S. Money Supply and Velocity
Federal Reserve has largely viewed the recently heightened inflation data to be transitory and remained firmly committed to its existing cohort of policies and stances while letting inflation run above its long-term target of 2% in a bid to not prematurely extinguish the economic recovery. Slack in the labor market persists as unemployment rates remain elevated and the number of employed sits well below pre-pandemic levels, conditions which should hinder inflation from rising to troubling levels near term. Unprecedented monetary and fiscal stimulus over the past year has injected liquidity into the system and is, indeed, a potential catalyst for higher inflation longer term. We also note that U.S. M2 money supply peaked at 27% in February from a year earlier, yet the velocity of money – the number of times one dollar is spent to buy goods and services per unit of time – is at its lowest level in 50 years and serves as one gauge that the recovery still has a way to go. Short-term inflation will likely trend higher as we cycle off the 2020 lows and we expect may run at a higher rate compared to subdued pre-pandemic levels. We remain of the mindset that all things equal, inflation is unlikely to take hold at a level that would serve to derail the recovering global economy. An allocation to a diversified pool of real assets can be an appropriate and effective way to protect portfolios from the potentially damaging repercussions of inflation.
We continue to encounter ample evidence of a global economy making steady progress toward self-sustaining and better synchronized growth. As a result, we remain favorably inclined toward risk assets with the full recognition that recovery from the pandemic is unlike anything we, as investors, have previously encountered. The path to a full economic recovery will remain heavily influenced by ongoing disparate conditions across the globe, including: 1) efforts to vaccinate populations, 2) the terms, conditions and expectations pertaining to individual governments’ economic stimulus efforts, and 3) differentiated valuations across global capital markets. While periodic bouts of market volatility may test our collective patience near term, we persevere with the opinion that investors continue to be appropriately diversified and remain focused on long-term objectives.
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US Capital Wealth Advisors, LLC (“USCWA”) is a Texas-based investment advisory firm registered with the United States Securities and Exchange Commission (“SEC”). As an independent, fee-only, registered investment advisor (RIA), USCWA is able to provide sophisticated, holistic wealth management services, with expanded access to investment solutions. We take our fiduciary responsibility to you seriously, which means we are committed to what is in your best interest. Our long-standing objective is to enable you to achieve your financial goals and to act as a trusted resource for you and your family.
This material is for informational purposes only and is an overview of the capital markets and is intended for educational and illustrative purposes only. It is not designed to cover every aspect of the markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. Readers should conduct their own research before making any investments. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by US Capital Wealth Advisors, LLC, as to its accuracy, completeness or correctness. US Capital Wealth Advisors, LLC does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Opinions included do not necessarily represent the views of US Capital Wealth Advisors, LLC. Please see USCWA’s ADV Part 2 for more information about USCWA.