Infrastructure Lifts Investor Optimism

Please note: This update was prepared on Friday, June 25, 2021, before the market’s close.

For about a second, infrastructure overshadowed inflation as the “I” word on investors’ minds.

Lawmakers in Washington struck a tentative deal on Thursday to fund highways and bridges, build enhanced rail systems and expand high-speed internet access. While far from assured, the prospect of another burst of government spending aimed at economic expansion added luster to the sunny sentiment on Wall Street this week as prices continued rising.

Just days from the year’s midpoint, we’re still somewhat surprised by the lack of volatility in the markets. For all the headline handwringing around everything from interest rates and tax hikes to the ongoing meme-stock rollercoaster, the markets have sloughed off these and other concerns without a single decline of 5% or more for the S&P 500.

That’s not to say we’re displeased by 2021’s gains. On a total return basis, the Dow Jones Industrial Average is up 12.8% for the year through Thursday, while the broader S&P 500, after clinching its 30th record close yesterday, has gained 14.4%. The MSCI EAFE index, a measure of developed international stock markets, has returned 10.0% through Thursday. The Bloomberg Barclays U.S. Aggregate Bond Index’s yield stood at 1.52%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 1.8% year-to-date.

Bonds Bounce

Policymakers at the Federal Reserve were unusually vocal this week as a nascent divide on inflation became more apparent among bank leaders.

Chair Jerome Powell reiterated last week that he sees inflation as transitory, heading back toward the bank’s 2% target next year. Other officials are more skeptical: St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan both said they expect inflation to remain higher than that through 2022. Cleveland’s Fed head, Loretta Mester, expressed concern that low interest rates and asset purchases could pose a threat to financial stability over time, while San Francisco Fed President Mary Daly commented that it’s time to begin talking about easing up on the central bank’s stimulative bond-buying program.

While the bond market is typically the sober companion to the more boisterous stock market, yields bounced around this week as bond traders tried to parse the Fed’s plans. The yield on the benchmark 10-year Treasury dropped to its lowest level since February, nearing 1.35% on Monday before rebounding back above 1.50% by week’s end.

Still, even as the inflation debate at the central bank goes public, it’s unlikely that a policy change will occur anytime soon—they’re still talking about possibly raising interest rates years, not week or months, down the road. A lot can (and will) happen between now and then.

Housing Market Simmers

Demand for houses amid the supply ebb continues to push prices higher, with the median home price surpassing $350,000 for the first time in May—that’s up 24% from the same time last year, the biggest annualized gain in National Association of Realtors’ data going back more than 20 years.

However, higher prices may be starting to curtail would-be buyers’ ability to act. Even with mortgage rates near record lows, applications have slowed year-over-year. Consumers are either being priced out or simply keeping their powder dry until costs come down. The pandemic pace of homebuying is due to settle down a bit amid enduring supply constraints and correlated higher prices—it’s simple economics.

Manufacturing Roars as Spending Shifts

Factories continue to fire on all cylinders. A survey of U.S. manufacturers released this week revealed the highest level of activity on record as producers race to meet pent-up demand. Meanwhile, a gauge of manufacturing activity showed robust growth across new orders, increased hiring and a backlog of demand.

As COVID restrictions are lifted, American consumers are also flocking to services again, even as consumer spending rose just 0.1% overall in May from the month prior. People were buying fewer cars and spending less on appliances and electronics (though spending here was still 20% higher last month than it was pre-pandemic). Instead, they shifted to spending more on in-person goods and services like clothing and dining out—up 0.7% from April, but about 1% less than pre-pandemic levels in February 2020.

We think it’s safe to assume that consumers will continue to drive the economic recovery through the summer months as people return to work (and earn more money). That increased purchasing power will allow businesses to not just recover but possibly expand and hire more employees—a virtuous cycle of growth.

Financial Planning Focus

Buying a Second Home

As many of us begin to turn travel daydreams into reality this summer and fall, some of you may be wondering what it would take to turn your favorite mountain, beach or lake home into a permanent family retreat.

Of course, buying a second property could have a major impact on your finances. Before taking the plunge, ask yourself the following questions:

1. Who will use it? Will a second home be just for you and your family, or do you plan to rent it out? Renting can defray costs, but don’t underestimate the time, hassle and expense of being a landlord. The need to hire a local property manager or professional cleaning staff can put a serious dent in the profits from any rental income. Plus, tax laws are different for rentals than they are for properties used solely as second homes. How will you account for your new property on your tax returns?
2. How will I pay for it? We generally advise clients to pay off the mortgage on their primary home before buying a second property, even if they plan on renting it out. As the pandemic made clear, demand for vacation rentals can be unpredictable, so a second home purchase can be risky if you’re relying on rental income to make the numbers work.
3. Do I understand the total costs? A second property will add a slew of new fixed expenses to your budget. As with any home purchase, you’ll want to have solid estimates of property taxes, insurance payments, mortgage payments, maintenance costs and utilities when considering a purchase. It’s also wise to create a rainy day fund for unexpected expenses that pop up.
4. Have I priced other options? How many weekends and vacation days will you realistically be able to spend in your new place? Compare ownership costs with prices for a similar rental in the area. Continuing to rent may prove a more affordable, flexible and less stressful alternative.
5. Can I still meet my financial goals? Don’t let a second home derail your progress toward other long-term goals, like paying for college or retirement.

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Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Sold Fidelity MSCI Materials Index ETF (FMAT). Bought iShares Core S&P 500 ETD (IVV).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

Sold iShares Gold Trust (IAU). Bought Invesco DB Commodity Index Tracking Fund (DBC).

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed the stock and bond markets’ reactions to last week’s Fed meeting, while Vice President Steve Johnson spoke about why investors should take stock of their financial plans and portfolios while they are otherwise relaxing this summer.

Looking Ahead

Next week brings informative reads on factory orders, car sales, construction spending, consumer confidence as well as several reads on the labor market, including the June unemployment figure. We’ll be here to break it all down for you.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.