Markets look to reach new highs as investor optimism returns

Thoughts

• Markets look to open the week higher as the S&P 500® Index sits less than 1% below the record high. Investors are encouraged by apparent progress on an infrastructure plan, along with growing optimism on the global economic rebound. May closed with a fractional gain for the S&P 500, marking the fourth-straight monthly gain. Historically, June is among the weakest months, falling on average 0.6% over the past 20 years. Markets have been stuck in a tight trading range since April as investors search for a positive catalyst to drive markets higher. Improving investor confidence and increasing adoption of a buy-the-dip approach could be that catalyst.
• Investor risk appetites have taken a subtle shift, with strong performance in small caps and emerging markets. This continues the trend from the past six months that saw small-cap value return 77% versus just 14% for large-cap growth. Global equities gained for the seventh-straight day on Friday, while “meme” stocks driven by Reddit have reemerged as a reflection of a risk-on attitude. Markets rose modestly on Friday despite the hot read on inflation, suggesting that investors agree with the Fed that the spike is transitory, and markets have priced in the risk.

News

• In the OECD’s recent quarterly update, it predicts global growth at the fastest pace in nearly 50 years, driven by aggressive fiscal spending and the momentum from vaccines. The global economy is expected to grow by 5.8% after contracting 3.5% last year, with 4.4% expected next year. Compared with the March report, the forecast has improved for the U.S., Europe, and China, while India declined. Despite the improved outlook for growth, the group does not see a sustained pickup in inflation.
• Focus will be on Fed speakers this week before the “quiet period” begins in advance of the June 15-16 meeting. Discussions around Fed tapering of asset purchases continue, with Dallas Fed President Kaplan again calling for tapering to begin due to several inflation drivers appearing persistent. This voice is being echoed by other officials, including comments by Vice Chair for Supervision Quarles and Vice Chair Clarida. This is a notable shift from comments from Chair Powell last month that it was not yet time to even contemplate having the tapering conversation. Interest rates have not reacted, with the 10-year Treasury yield down modestly for the week and in a tight trading range since March. The core personal consumption expenditure (PCE) price index, the gauge preferred by the Fed, jumped 3.1% from a year ago, well above the Fed’s 2% target and the highest reading since 1992.
• Bipartisan infrastructure talks continue following the Republican release of a $928 billion plan, up from the previous $568 billion proposal. President Biden’s current plan is at $1.7 trillion, down from $2.3 trillion, though a wide gap remains. The primary disagreement remains on how the plans would be funded, with Republicans continuing to push back on tax increases. Progressive Democrats continue to push for the abandonment of bipartisan talks in order to get a deal passed by August.

What to Watch

• ISM data will be in focus in a holiday-shortened week, with ISM manufacturing on Tuesday and ISM nonmanufacturing on Thursday. Other notable releases include the Fed’s Beige Book on Wednesday and durable goods and the monthly payroll report on Friday.