The economic expansion is still strong
The economy is still growing rapidly 18 months after the unemployment rate peaked at 14.8%. U.S. GDP has surpassed pre-pandemic levels, as have corporate profits, and many measures of activity are at multi-decade highs. Despite investor fears, the underlying growth trends are still positive.
For many, jobs are the key metric since the pandemic directly impacted individuals' ability to work and earn a living. Over 75% of the jobs lost during the pandemic have been regained and the unemployment rate has fallen to only 5.2%. While some sectors are still struggling to recover, others are struggling to hire workers fast enough. There are officially more job openings than unemployed individuals - an imbalance that is positive but that speaks to the changing nature of worker skills, job locations and more.
Inflation remains high and will depend on supply constraints
Inflation remains elevated across a number of traditional measures. The PCE inflation rate favored by the Fed, for instance, is at its highest levels since the early 1990s. The Fed itself has made it clear that their inflation targets have been reached, setting the stage for a reduction in asset purchases.
Many different factors are often referred to under the term “inflation.” Traditionally, inflation is seen as a monetary phenomenon. This made the 2010’s perplexing to many investors since vast amounts of monetary stimulus failed to materialize in the form of pricing pressures. Today, the biggest inflationary factors are the swift economic rebound and the on-going supply chain disruptions. While impossible to predict accurately, these effects will likely improve over time.
The Fed will likely begin tapering soon
The Fed will likely begin tapering its asset purchases in the fourth quarter. The central bank has been broadcasting this possibility for much of the year and has made it clear that tapering will be a gradual process that will last well into 2022. They have also communicated that rate hikes will require a different, more stringent set of criteria and will likely not begin until after their asset purchases end.
For investors, this means that there will likely be upward pressure on interest rates over a long period of time. Still, investors should not overreact to these gradual rate rises, especially given the extraordinarily low level of rates today.
Government spending and the debt ceiling are front and center
Partisanship in Washington is on full display as a number of issues are being discussed. In the short run, the debt ceiling is the most pressing concern for financial markets which fear a repeat of 2011’s fiscal cliff scenario. In the long run, new spending proposals will have an important impact on infrastructure, taxes and more.
While these developments are important to watch, investors ought to maintain a long-term perspective on the impact of Washington policy on markets. Financial markets and portfolios have performed well across a variety of party leadership and tax regimes. Regardless of how one personally feels about new bills and proposals, it’s important to focus more on staying invested.
International markets still have diversification benefits
Although emerging markets have stumbled this year due to the delta variant and challenges in China, staying internationally diversified is still important. Many of the challenges around debt, shadow banking and regulation in China have been in focus for over a decade. And while these issues are coming to a head, the Chinese government is likely to be in a position to cushion any major fallout.