• Stay for May. Despite the old Wall Street adage of “sell in May and go away”, the S&P 500 registered the fourth consecutive month of positive returns by eking out a slight gain for May.  The relatively subdued month, however, concealed some modest volatility stirring beneath the surface.   The threat of rising inflation was pitted against disappointing job numbers, as the market attempts to second-guess the Federal’s Reserve’s policy path.

• Hotter Inflation. Consumer prices for May accelerated at their fastest pace in nearly 13 years, as inflation pressures continued to build in the US economy.  For the most part, most of the price increases are driven by categories that have been heavily disrupted by the pandemic and remained under pressure from supply chain challenges.  While transitory pressures no doubt play a part, there are concerns that some of the stresses may be more permanent in nature.  For now, the Federal Reserve has been largely dismissive of the numbers, but a persistently hotter inflation may force the Fed to hike rates earlier than expected.
• Labor Shortage. There are clear signs that the labor market continues to improve in the US:  job postings are up, jobless claims are down, and workers are putting in more hours.  In particular, sectors like manufacturing, logistics, and restaurants are booming.  Employers say they desperately need new workers, but face a troubling inability to hire.  The labor market supply remains suppressed due to generous unemployment benefits, lingering health concerns, and lack of childcare availability.

• Rising Wages. In an effort to entice workers to come back to work, businesses are trying to solve it the old-fashioned way:  by raising wages and offering more generous benefits and working conditions.  Employers are offering signing bonuses, and some are even paying applicants merely to show up for interviews.  Average hourly wages rose solidly in April and May, lending credence to the belief that inflationary pressures go beyond mere commodities’ price increase.

• Should the current labor shortage persist, it will have implications for the economy in 2021 and beyond, presenting a headwind for growth and profit margins.  The mismatch between labor supply and demand is top of mind for US policymakers.  The federal unemployment bonus is set to expire in the fall, and we expect that should help ease the labor shortage.

• Market Outlook. We are encouraged by the rebound underway in the economy and the healthy conclusion to the Q1 corporate earnings season.  As the economy continues to reopen, we believe there is more runway for continued expansion.  Monetary and fiscal policies, for now, remain extremely accommodative.  The assemblage of rapid reopening, generous unemployment benefits, and lingering health concerns have created imbalances in the labor market and caused supply chain disruptions.  We would like to caution against excessively extrapolating long-term trends from current noise, but will continue to keep an eye on developments in the macroeconomic environment.

Christopher Lai

Senior Portfolio Manager

06/11/2021