August Market Outlook
As usual, we would like first to reflect on the past month first. July, as expected, was a very calm and somewhat quiet period this summer, with most investment activity taking a summer “vacation” and trading volume remaining relatively low. Comparing to previous months, there have been no major market events besides a short-lived and relatively small correction in equity markets in the middle of the month. Overall, the broad market, represented by S&P 500, appears to be stuck around the 4400 levels as investors awaiting more information on economic developments later in August. Commodities continue to be elevated as economic growth rebounds across the globe, however, the Covid-19 Delta variant continues to pressure further growth.
The three major market-moving events this month are job numbers, inflation, and the Jackson Hole Fed meeting at the end of the month. With respect to jobs number, we have already encountered some reports earlier this week. Released numbers appear to be somewhat mixed, however, it is clear that the market is not liking it. From what we have been reading and seeing, there is still a significant shortage of workers and companies struggling to find a workforce. Some blame federal unemployment support, while others believe that the virus is still a risk, which forces many workers to avoid work and public places. It is hard to say what is causing an employment issue right now, but it is clear the shortage exists, and it is negatively affecting the broad economic growth.
In terms of inflation, we begin to see some slowdown in the inflation rate and, as many economists predicted, it might truly be transitory. It appears that growth in prices is slowing down, however, it is too early to say confidently that inflation is coming back to normal. Although, the Fed and Treasury continue to reassure that inflation stays in line with their goals.
One of the major economic events this month is the Fed meeting at Jackson Hole. Many analysts, traders, and investors are going to closely watch and monitor what the Fed members are going to say as market participants hope to get a clue on what the Fed is planning on doing later this year. As inflation stays elevated and monetary support is not as much needed anymore, we are expecting the Fed to start talking about tapering; however, is it going to start later this year, as some believe, or will happen sometime in 2022 remains to be seen. Still, it is getting clear that the monetary support did its job, and it's time to let the economy and markets off the life support.
Another issue related to the Fed, and we believe it is very important to consider such possibilities now, is the problem of what is going to happen after we stop getting monetary support and in fact will be getting monetary tightening. As inflation remains elevated and possibly will stay elevated for an extended period of time, the Fed has no choice but to start tapering, thus, slowing down the economic growth, which still remains somewhat fragile and under pressure as Delta variant begins to rage across the world. On the other hand, continuous support results in inflation, which, as history shows, can get out of hand quickly. So based on such a scenario, proposed by some respectable economics, there is a possibility of a poor end result either way. Either we would have a high level of inflation, which hurts consumers and businesses, or we would have high-interest rates, which hurt consumers and businesses. Still, it remains to be seen.
In terms of meme stocks, July remained relatively calm although the recent Robinhood IPO sparked a lot of interest among Reddit investors, and newly traded stock is reaching relatively high levels. Although, as we have expected earlier, the popularity of meme stocks and Reddit investors is slowly fading, and the retail investors who were interested start to switch back to cryptocurrencies.
As a result, Bitcoin and cryptocurrencies overall increased significantly in value this month. Moreover, talks about Amazon considering cryptocurrencies boosted Bitcoin price even further. In addition, as we talked earlier about it, many retail investors began to flee the stock market in search of a more compelling opportunity to make high returns, the value of cryptocurrencies will subsequently rise. Unfortunately, it looks more and more like a big investment scheme and not a real investment. We slowly but surely continue to lose interest in cryptocurrencies and continue to advise our clients to be highly careful when considering an investment or holding actual cryptocurrencies.
In the end, just some food for thought - the IRS has seized $1.2 billion worth of cryptocurrency this fiscal year.
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