Stock market returns proved fairly muted in this holiday-shortened week. Optimism tied to strong manufacturing data was offset by the ever-present fears posed by inflation.
This week the Institute for Supply Management released May manufacturing activity data that demonstrated a twelfth consecutive month of growth, a sign the economy continues on a strong growth trajectory. Pent-up demand continues to be unleashed as the economy reopens. While it is no doubt a good sign to see demand recovering, companies and suppliers are struggling to keep up. Labor shortages, not to mention basic material shortages, are leading to longer lead times in getting products to market.
These very same basic material shortages are where some of the near-term inflationary concerns are rising as demand outstrips supply. Supply and demand have also been front of mind in the energy sector as the price of oil hit its highest level this week since late 2018. Last year, in the heart of the pandemic, demand fell off a cliff and there was so much supply that at one point the price of oil went negative. Fast forward to the present and demand is back on the rise and OPEC+ now believes that not only is the prior supply glut nearly gone, but oil stockpiles may get worked down rather rapidly the back half of this year given the strength of the renewed demand. We’ve come a long way in a short amount of time.
What is amazing through all the inflation talk we have seen this year is that the stock market is still hovering near all-time highs. While seeing input costs rise is never fun, modest inflation can be good for corporate America. When prices are rising at controlled levels it usually means that the economy is healthy. If the economy is healthy, demand for goods and services rise and that ultimately flows through to the revenue and earnings of corporations – small and large. Given that stock prices tend to follow earnings growth over time, prospects for stocks could remain bright.
Be safe and be well.
Market comments are based on the S&P 500 index which is unmanaged and cannot be directly invested into.
Past performance is no guarantee of future results. Investing involves risk and the potential to lose principal.
Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed. This commentary is provided for general educational purposes only and is not a recommendation of any kind or investment advice.