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June Market Recap: Inflation Is Here. Now What?

Optimism stemming from economic reopening propelled continued ascent in U.S. stocks, which gained for a fifth consecutive month and a fifth consecutive quarter. Accommodative monetary policy and government stimulus remain strong tailwinds for equities. International issues failed to keep pace in June, partly due to less effective vaccine rollouts.

Markets Unfazed by Inflation

In mid-June, following the highest annual increase in consumer prices since 2008, the Fed acknowledged inflationary pressures may force it to taper bond purchase or raise interest rates sooner than expected. While a more hawkish Fed is feared by many investors, markets were unfazed. Some may have found confidence the Fed will find the right balance between supporting growth and keeping inflation in check. Long-term interest rates declined, and the “reflation” trade in place for most of the past few quarters retreated. Growth stocks outperformed for the month, led by mega-cap technology.

From our perspective, higher inflation is already here. This does not mean we are headed to the stagflation of the 70s or double-digit interest rates from the early 80s. The pandemic created unique supply-and-demand shocks, which should normalize over time. The greatest headwind for inflation is innovation, which is in strong supply.

Still, with more massive stimulus packages likely on the way, investors may be underappreciating the odds the Fed will be forced to play catch up more aggressively. It would not be surprising to see the reflation trade and value stocks reassert themselves in the second half, especially as shutdowns ease across the globe and more people return to offices.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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