Last week’s Monday stock market pullback was a blip. At the time, there was a heightened narrative around downside stock market risk in the broader media. All kinds of commentaries surfaced to assign cause to the one-day 2% pullback and speculate about the potential downside still to come. The cited culprits ranged from inflation pressures, housing speculation, high stock valuations, and the Covid-19 Delta variant, to name a few. We wrote at the time that such downside stock market moves should be viewed as normal and we felt that so long as Fed policies were supportive, that this would prove to be a healthy downside move that refreshes the market. We emphasized that ALL bull markets experience pullbacks, sell-offs, and corrections while still remaining intact. Before the ink was dry on that commentary, the market resumed its upward trajectory, posting five straight days of gains.

Make no mistake, there will come a time when this bull market comes to an end and stock market returns moderate and perhaps even disappoint. We just don’t think that time is now—predominantly due to highly supportive Fed policy. But at the same time, there will be some indicators that things are beginning to shift beneath the surface and outside of the scope of many media narratives. Let’s take a look at a few.

There’s been a lot of inflation talk. The pricing pressure has been concentrated in producer prices (commodities) but the flow-through to consumer prices has been far less extreme. Now we see signs of some cooling in commodities. For example lumber prices fell from an extreme of 1670 in May to 634 yesterday (and it’s down again today). The housing market is cooling down and leveling off too. Maybe the Fed is right and inflationary pressures are transitory. We are watching it closely.

One sign of continuing inflationary pressure is the used car market. The used car market is priced more richly than it has ever been due to supply shortages in the computer chip market for new cars. This has caused used cars with low miles to sell for more than their MSRP a year ago. It’s too soon to tell for sure but there are signs of recent cooling in this market too. Certainly consumer finance plays a big role in consumer behavior in autos and there are signs of tightening in consumer finance.

There are a couple of issues percolating related to consumer debt that could prove problematic and lead to economic weakness. There is a foreclosure moratorium in housing that will end at the end of this month. The foreclosure process could result in an increased supply of homes for sale and further downward home pricing pressure. Additionally, there is mortgage forbearance that comes to an end at the end of September. In total there are millions of homeowners behind in their mortgage payments that will need to be resolved. These two things combined could cause economic cooling and require continued supportive policy from the Fed. We believe these things substantially influence the decisions behind continuing Fed policy support.

Erik Ogard, CFA®

Investment Committee Chairman