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Global equity markets finished higher for the week. In the U.S., the S&P 500 Index (S&P 500) reached record highs and closed the week at a level of 4,281, representing a gain of 2.76%, while the Russell Midcap Index moved 3.75 % higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 4.33% over the week. International equity performance was also positive as developed and emerging markets returned 1.51% and 1.42%, respectively. Finally, the 10-year U.S. Treasury yield ticked higher, closing the week at 1.54%.

Over the past few weeks, the headlines across nearly every major market news platform have revolved around inflation, interest rates, and the dissection of each word spoken by Federal Reserve members of the Federal Open Market Committee (FOMC). While these concerns are undoubtedly relevant, monetary policy set forth by the FOMC is only one side of the puzzle when it comes to future economic growth, interest rates, and inflation. So, outside of all of the recent monetary talk, what is going on with fiscal policy?

Last week, according to USA Today, the Biden administration and a bipartisan group of lawmakers reached an agreement on a compromised infrastructure spending bill totaling $1.2 trillion, including $579 billion in new spending over eight years, focusing only on infrastructure projects such as roads, bridges, rail, broadband internet, water and sewer pipes, and electric vehicles. While the compromise announcement is a positive step forward, it is important to note that the bill has not been passed by Congress yet, and, if passed, the potential for a second infrastructure spending bill exists.

The old economics adage of “there’s no free lunch” certainly applies here. Assuming that the previously mentioned infrastructure spending bill is passed, tax increases seem likely. The Biden administration has already outlined areas for tax increases that include, but are not limited to, corporate rates, foreign income rates, top individual income rates, and capital gains rates. However, anticipated pushback from Republican lawmakers could make some of the contemplated significant tax increases unlikely. As a result, many economists, including those from Goldman Sachs (see below chart published on 6/23/21), expect Congress to enact a more modest tax increase than the original Biden administration proposal while also expecting approval of at least 1% to 2% of GDP in spending.

Source: White House Office of Management and Budget. Goldman Sachs Global Investment Research

So what effect does this spending have on the economy and the stock market, after what we currently know about monetary policy? In other words, will more government spending help or hurt the economy? The answer, for now, is mixed. Modest average target long-term inflation, near-term expansionary monetary policy, and expansionary fiscal spending are generally positive for the economy and bullish signs for equity investors. Infrastructure spending may also create more job opportunities and push the Nation’s unemployment level lower. However, over the longer term, a hawkish Federal Reserve and increased fiscal deficits will present downward pressure on the strength of the U.S. dollar and the economy’s long-term growth potential.

As a digression, it would be imprudent of us not to mention in the week’s update the incredible strength the U.S. consumer displayed and the popularity of e-commerce via Amazon’s 48 hour Prime Day this past Monday and Tuesday. Adobe Analytics estimated that total e-commerce sales surpassed $11 billion during Amazon’s Prime Day 2021, representing 6.1% growth from transactions during last year’s mid-October event. In addition, according to Digital Commerce 360, Amazon sold $10.4 billion worth of goods on Prime Day last year, which was up 45.2% from $7.16 billion spent online in 2019. The consumer appears to be alive and well, and the continued growth of e-commerce presents attractive investment opportunities that are worthy of consideration, in our opinion.

Given all of the volatility that can evolve from various economic policies and the continuously changing landscape of our markets, we encourage investors to work with experienced financial professionals to help build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk. Best wishes for the week ahead!

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.

Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 6/25/21. Rates and Economic Calendar Data from Bloomberg as of 6/25/21. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.

Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Definitions

MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.